Properly Diversify Your Investments by Pursuing Quality
One of the most common forms of advice about investing is that you need to diversify.
But the smart investor doesn't just diversify: she diversifies into quality investments.
The point is that you shouldn't just randomly buy up a bunch of different kinds of investments and feel content.
Diversifying for its own sake can actually hurt your overall investment returns.
The problem with mere diversification is that it can make the average investor susceptible to buying up both good and bad investments.
The bad investments will be a drag on the overall return of your portfolio.
It is not uncommon for financial planners to suggest that you diversify across asset types like stocks, bonds and cash.
This is actually a bad idea.
It is an historical fact that stocks significantly outperform bonds and cash over most periods of time.
If your money is earmarked for a time more than three years away, it should all be invested in the stock equities of strong companies.
If you choose to diversify across bonds and cash, you will actually significantly dampen the overall return of your money.
This is the kind of risk that financial advisers tend not to emphasize.
But in the long run it could amount to a difference of hundreds of thousands of dollars when you retire.
In addition to diversifying over asset types, many advisors recommend that you diversify across sectors like telecommunications, energy, manufacturing, etc.
Again, we think this is a bad idea.
The number one principle of investing is to chase after quality.
But if your operating on the mantra that it is wise to diversify across sectors, then you might be tempted to buy the stocks of poor companies along with the good ones just because they fall within a sector.
Remember: your first investment filter should always be quality.
Any investment method that tempts you to overlook the quality of the investment should be abandoned.
The key to investment diversification is to make sure that your assets are spread over approximately 20-30 strong companies that you're able to buy at reasonable prices.
You can determine whether a company is reasonable by looking at its P/E ratio.
You can determine whether a company is strong by looking at its return on equity and overall growth in market share.
The overall lesson is this: if you're investing for the long-term, maximize your return by diversifying into good investments.
Just remember: Don't diversify blindly!
But the smart investor doesn't just diversify: she diversifies into quality investments.
The point is that you shouldn't just randomly buy up a bunch of different kinds of investments and feel content.
Diversifying for its own sake can actually hurt your overall investment returns.
The problem with mere diversification is that it can make the average investor susceptible to buying up both good and bad investments.
The bad investments will be a drag on the overall return of your portfolio.
It is not uncommon for financial planners to suggest that you diversify across asset types like stocks, bonds and cash.
This is actually a bad idea.
It is an historical fact that stocks significantly outperform bonds and cash over most periods of time.
If your money is earmarked for a time more than three years away, it should all be invested in the stock equities of strong companies.
If you choose to diversify across bonds and cash, you will actually significantly dampen the overall return of your money.
This is the kind of risk that financial advisers tend not to emphasize.
But in the long run it could amount to a difference of hundreds of thousands of dollars when you retire.
In addition to diversifying over asset types, many advisors recommend that you diversify across sectors like telecommunications, energy, manufacturing, etc.
Again, we think this is a bad idea.
The number one principle of investing is to chase after quality.
But if your operating on the mantra that it is wise to diversify across sectors, then you might be tempted to buy the stocks of poor companies along with the good ones just because they fall within a sector.
Remember: your first investment filter should always be quality.
Any investment method that tempts you to overlook the quality of the investment should be abandoned.
The key to investment diversification is to make sure that your assets are spread over approximately 20-30 strong companies that you're able to buy at reasonable prices.
You can determine whether a company is reasonable by looking at its P/E ratio.
You can determine whether a company is strong by looking at its return on equity and overall growth in market share.
The overall lesson is this: if you're investing for the long-term, maximize your return by diversifying into good investments.
Just remember: Don't diversify blindly!
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