Poor old diversification is so misunderstood and misapplied

Diversification…is misunderstood and misapplied by both investment pros and non-pros alike. Let’s get the diversification misunderstandings, understood. Why is diversification misunderstood as well as its benefits? We’re talking fairly sophisticated mathematics here and many “financial advisors” are poor at math other than calculating their commission checks. I love math and a few years ago my daughter’s respected high school asked me if I was interested in teaching statistics because I had found a mistake on a stats exam and talked with my daughter’s statistics teacher. He asked me to apply to replace him. Honored that he would ask… First a quick definition.  Real diversification – in our definition – is “owning the whole market”. Smart investing is owning company stocks across many asset classes – and deeply within each asset class. This includes the USA, other developed countries and emerging markets. So with diversification think “across” asset classes and “within” each asset class. Another way to talk about diversification is to describe the opposite idea “concentration”. Owning more of one company than it represents in the total market is concentration. Owning individual stocks is super high concentration which is high risk without a corresponding expectation of return. While diversification is our investment friend, concentration is our investment enemy. A big part of the problem is the non-stop flow of information from the mainstream financial media who sell their products and services on the basis of “betting” – concentration. They would have you believe that they can forecast price movements of stocks and of sectors. You “concentrate” your holdings in the securities they think will do well. Betting is gambling. Betting is speculating....

Spock’s advice on Live Long and Prosper in the Market

One of the challenges of financial planning and investing is keeping a clear head as markets go up and down.  We’re talking about serious emotions and many financial media pundits fan the flames making it worse. Be assured it is completely normal to feel concerned when the market drops. Feel like you are Spock-like? Let’s say you exhibit rigorous Vulcan Logic – there’s still your emotional human half! The key is awareness that you’re experiencing concern and remind yourself that we expect erratic market moves. It’s NORMAL market behavior! Swings in market volatility are NORMAL!  No matter how hyped up they get in the Wall Street Journal or on the CNBC channel – it’s all hype. We KNOW the market moves unpredictably up and down short term, but predictably up over longer time periods. Yet “despair” can rear it’s ugly head. So don’t beat yourself up if you feel some concern bordering on despair when large market drops occur. Be like Spock – look at actual data from previous market “corrections” and how the market “pops” at some point after the correction and eventually starts knocking on the doors of new market highs! So far the market has not remained permanently flat or down. Also keep in mind the definition of “market”! Are we talking the Dow Jones, NASDAQ or S&P500 (three popular indices). Those three essentially represent large U.S. companies! What about small,  microcap U.S. company stock, large, small international company stock and large, small emerging markets company stock?  We tend to ignore all these other parts of the investment universe! And these other asset classes outside of large U.S. exhibit higher returns,...