Mark Cuban said this in a video interview. He also added that diversifying will diversify your profits away. Warren Buffett said, “diversification is protection against ignorance.”
If your priority is to see a modest return on your investment in the long term then you should diversify. If your goal is to make a large return in a relatively short amount of time then diversifying will likely not get you there.
Conventional investing advice has a way of altering your perception. People who would gasp at your 1 stock portfolio would at the same time congratulate you on investing your life savings in a new business venture — go for your dreams! Putting it all into your one business is the same as putting it all on one stock. Most people would have been better off putting their money with Jeff Bezos than whatever costly venture they got themselves into.
Diversifying is recommended for every stock portfolio while the status-quo for everything else is to put all of your eggs in one basket. Who diversifies their education? How often do you get the advice to diversify your girlfriends?
I’m not recommending that everyone have a 5 stock portfolio. Warren Buffett also said 99% of people should just invest in an index fund. Most people aren’t skilled or lucky enough though to come out victorious in the stock market without diversification.
Sometimes I eat potato chips multiple days in a row. I’m torn between buying small bags or bigger bags. It’s a dilemma of economics or health. Small bags at the local convenience store will cost me $1.75 which doesn’t sound like much but imagine that being an everyday expenditure. In a month that would equal $52.50 and this is assuming you don’t buy anything else. You’re already eating potato chips every day, what makes you think you’re not going to be a bigger loser and buy a soda or a lottery ticket?
That $52.50 would equal over $600 a year. It doesn’t sound like much but at the same time all you’re getting is potato chips. It’s the small habits that can chip away at your money. If you’re filling up gas you don’t have to come out of the gas station with anything else but fuel for your vehicle. There’s probably a long list of daily habits or bigger weekly habits that you can cut out.
The other week while I was walking my dog I asked a woman I sort of know if she was into the stock market. She said that she wasn’t and that she just puts her money into mutual funds. “Then you are in the stock market,” I said.
It made me realize that many if not most people are okay with the idea of having money in the stock market, they’re just not comfortable with managing their own money. Having it managed professionally gives them comfort.
That guy or gal at your bank signing you up into one of their mutual funds is not an expert in the financial markets. If they were so much smarter than you in the markets they would be sitting on a beach instead of their crumby office. They’re salespeople. They get a commission and their company gets a 1-2% cut from your whole investment every year, win or lose. Easy money. In return you might make money but most of all you get the comfort of believing you’re doing what’s right.
Going through my bank’s list of mutual funds I found that the one with the highest 10 year return and lowest fee was a S&P 500 Index fund. They won’t ever push this fund though because it’s not very actively managed if at all since it just follows an index. In order to justify their 1-2% fee they have to make it seem like they’re doing something even if it means actively losing your money. 1% doesn’t sound like much but it really adds up.
I suggested to this woman that a low cost S&P 500 ETF would probably have much lower fees and a better return and that she should check the annual returns of her current mutual fund and compare.
“Nope, no, I don’t want to deal with it. I don’t know anything about that stuff,” she said. This is why financial advisers even exist. When people see their mutual fund tank or languish they don’t want to blame themselves and be confused on what to do.
The truth is you don’t have to know anything. You start a trading account and periodically put money into a Vanguard or Spyder ETF. It’s easier than online shopping.