What's your idea of diversification

According to this Marketwatch article:

Need to have: Stocks, bonds
Nice to have: Real estate
Don't really need: Sector funds, gold, commodities

[jIM_Ohio]

Diversification is a means to reaching your goal with least amount of risk.

For one person diversification could be owning 10 different stocks in 10 different sectors. If these stocks help reach a goal, no reason to think an 11th would help situation any more.

That being said, I think stocks-bonds is the basic.

IMO real estate is part of bond position.
IMO commodities exposure is a good thing at a basic level (5%)

The goal of diversification can be 2 fold
1) protect assets in a down market (preservation is more important than growth in many cases)
2) provide same dollar returns with smaller position. For example, if I allocate 40% of a 100k portfolio to large caps and 10% to emerging markets.

I expect the large caps to give a solid 8% consistent return. Because most of my calculations estimate a 9% annual return... most of my return comes from this position, the diversification is trying to boost this.
I expect the emerging markets to give a home run which trounces the 8%- maybe a 50% return every 5th year.

so 40%*100k=40k*8%=$3200 return each year
so 10%*100k=10k*50%=$5000 return on occasion

meaning the diversification provides the same dollar return with a smaller position than the consistent return of a larger position. This is how I construct my 99% equity portfolio.

[Fern]

Mutual fund companies, with their lifestyle and target funds, make diversification super easy. If you want, they will instantly diversify for you with just a single fund.

If you hold too many funds, it defeats the purpose and just costs you more in fees, so you have to make sure your fund objectives don't overlap and aren't redundant.

[disneysteve]

To me, diversifying involves different types of assets like stocks, bonds, cash, real estate, as well as different holdings within those classes, like large company, small company, growth, value, etc.

[ccsraj]

Idea of diversification.

Diversification is nothing but diverting funds into different option which should earn money with minimum risk.

INVESTING IN VARIOUS FIELDS LIKE [PHARMA,AUTOMOBILE,BANKING ] IN SHARE MARKET.

Real estate investment in developing countries would provide a golden chair.

[serendipityaey]

Can you diversify too much? I understand about percentages and different classes, but I'm not sure what my investment choices should be within those percentages. How many choices is too many?

[Scanner]

Serend,

You'll get many different opinions here on this but IMO, 1 mutual fund, since you will own probably over 100 companies (funds like Janus Twenty are an exception) is diversified enough when you have $0.00

As you grow, you add more.

Why? Because you have more to lose.

So IMO, yes, you can be overdiversifed.

My sister was an example of this who owned about 11 funds with $33,000.

Here is my formula:

0 - $15,000: 1 fund/ETF's

$15,000-50,000 2 funds/ETF's

$50,000 - $100,000 3 funds/ETF's

$100,000 - $500,000 4 funds/ETF's

$500,000+ 5 funds w/perhaps some speculation positions

After that, that's all you'll ever need.

Asset allocation is another discussion.

I also differ that in today's economy you need more exposure to commodities than an optional 5%.

[disneysteve]

I think in today's world, it is possible to be well diversified with one fund such as a target date retirement fund. Those can give you exposure to a variety of domestic and international stocks and bonds. For someone just starting out with limited money to invest, that might be a good way to go for instant diversification from day one.

Something to consider when investing is also any fees involved. Many funds have an account maintenance fee until your balance reaches a certain level, so you don't want to go buying 5 different funds at once if you will be hit with a $20 or $30 fee per fund per year. Better to start with one fund until you are above the minimum, then add another, then another.

[Scanner]

Yes, I agree.

I think the idea here is getting idea of what is "good money" to you and good money to JimOhio and good money to Sweeps and so on.

I listed my table here because look at it this way.

Let's say I start with an S & P 500 fund and I accumulate $14,500 and then right before I decide to buy another fund, the market corrects 40%. I then now have $8700 in my account (but still the same # of shares).

Well, that's not a lot of money loss to me (but maybe to someone else it is). Sure, I'm upset as anyone but I can relax and just buy some more shares with Roth IRA contribution and I'm on the road again.

However, if I have $500,000 in that same account and I lose 40%, I now have $300,000.

I now have a paper loss of $200,000.

I can't make that up with a Roth IRA contribution that year.

Now. . .that's a lot of money to me.

(maybe to someone else it isn't)

But a 40% loss would be unlikely if I am spread across a REIT, a commodity, an international and a domestic. ( I could see all of them losing perhaps 10-20%, but not 40%).

If you throw too many chips out on the table, then you can really get the benefit of bull runs, which on average happen about 40 out of 365 days/year with no prediction.

[jIM_Ohio]

Serend,

You'll get many different opinions here on this but IMO, 1 mutual fund, since you will own probably over 100 companies (funds like Janus Twenty are an exception) is diversified enough when you have $0.00

As you grow, you add more.

Why? Because you have more to lose.

So IMO, yes, you can be overdiversifed.

My sister was an example of this who owned about 11 funds with $33,000.

Here is my formula:

0 - $15,000: 1 fund/ETF's

$15,000-50,000 2 funds/ETF's

$50,000 - $100,000 3 funds/ETF's

$100,000 - $500,000 4 funds/ETF's

$500,000+ 5 funds w/perhaps some speculation positions

After that, that's all you'll ever need.

Asset allocation is another discussion.

I also differ that in today's economy you need more exposure to commodities than an optional 5%.

This guideline is well thought out (assets to number of funds). I started with $0 and immediately went into about 5 funds.

In my 401k this does not matter- start small, 5-7 funds, time grows the money.
In my Roth I started with 5 funds. A few asset allocation tweaks later I have 6 funds (2 of them new), closed out of one fund, and for the most part I use a similar philosophy to my 401k.

It is OK to start with 2-3 funds- the basics- large cap, small cap, international, for example, then add others (mid cap, international small cap, emerging markets) as you gain more assets. Some of the issues will deal with fund minimums- there are ways around that (T Rowe Price has provisions to waive minimums on every fund), most of the issue is asset allocation, which is another discussion.

One other point is my 6 fund position will increase to around 9-12 funds real soon. This is an allocation decision, but here goes the explanation.

My allocation is
43% large cap domestic
15% mid cap domestic
15% small cap domestic
15% large cap international
10% small cap international
2% bonds

There are two forces moving in my portfolio right now
1) I sell off 1% to bonds every 6 months.
2) I want 1/3 of each position above to get more aggressive.

Most of my funds are on the diversified and conservative end. For example my large cap fund is PRFDX, and that is one of most conservative 100% equity funds available.

My plan is to hold around 30% of my large cap position in the diversified fund. The other 13% will be in an aggressive large cap fund. Janus Twenty is an example, ultra bull is the fund I will probably choose (2X return of S&P 500).
The 15% positions would be 10% diversified and 5% aggressive. Looking for the 5% position to be a concentrated fund, with expected returns close to 15-20% short term.

I can then rebalance twice per year

1 time is rebalancing the market caps (so making sure the large caps have a 30-13 split, mid caps have a 10-5 split)
1 time is making sure the whole portfolio is 43-15-15-15-10

The whole idea is to buy low, sell high, and give myself mechanical methods to do so.

[Scanner]

Rebalancing is another discussion, although tied at the hip for # of funds. My rebalancing method is not mechanical. Mine is more "fluid", trying to assess 10 year trends. For instance, if oil drops to below $60/barrel (a big if), I may jump out of SLV and into USO. I still wouldn't allocate more than 33% of my portfolio to a commodity. And to me, precious metals and oil are the "mother" of commodities, since they are "economic standards."

However, I may not. SLV was a long term play for me. I may be happy to just keep the position.

At my portfolio size, I'd like to hold to 3 funds/ETF's until it tops $100,000 and then I further diversifty to 4 funds. If my portfolio drops below $100,000 after it tops $100,000, I'd probably still hold 4 since the assets would be in effect "on sale."

However, as I have said before, I have "ants in my pants" with international's bull run the last 10 years. I may jump into another sector - REIT or financials and hold steady at 3 funds/ETF's until I top $100,000 in my portfolio.

When I get 10 years from retirement, then I'll start thinking bonds for my "5th position" in my portfolio.

We all manage things differently. I would not be able to produce a thesis on why my method is better than yours or vice-versa.

[serendipityaey]

Thanks for the advice!

[Coleroo]

for me, personally, i feel real diversification is a mixture of a variety of investment vehicles...not just a mixture of good stock.... such as having money not only in the stock market, but also in a high interest savings account, various commodities (oil, gold, etc), rental units, small businesses (personally owned or as a private investor), and physical real estate (owning and holding land or houses). I see a trend towards people putting all of their money into the stock market with the thought that it is "divesified" because of the many different "types" of stock that can be held. but to me, a stock market crash is a stock market crash regardless of how well your stock is diversified amongst the various funds.

if you're well diversified with a variety of ways to make money - a crash in one area will not harm you quite as much.

with that said though i think stock market owning should be fully divesified as well with small cap, mid cap, large cap, growth stock, etc etc, based on you own personal risk assessment.

[Broken Arrow]

Right. Risk management. Can't predict the future? Diversify.

[Duchesse]

Cash, RE, stocks, ETF's, and bonds. This helps me to at night.