Comments on: Saving and Investing: The Importance of Diversification http://www.getrichslowly.org/blog/2007/04/16/saving-and-investing-the-importance-of-diversification/ Personal finance that makes cents. Common sense advice on topics from high interest savings accounts, frugality, cd rates, money market accounts, mortgage rates, how to get out of debt, money management and more. Sun, 21 Mar 2010 19:44:09 +0000 http://wordpress.org/?v=2.7.1 hourly 1 By: Mortgage Prepayment Made Easy: Own Your Home in Half the Time ? Get Rich Slowly http://www.getrichslowly.org/blog/2007/04/16/saving-and-investing-the-importance-of-diversification/#comment-117068 Mortgage Prepayment Made Easy: Own Your Home in Half the Time ? Get Rich Slowly Tue, 12 Feb 2008 23:15:17 +0000 http://www.getrichslowly.org/blog/2007/04/16/saving-and-investing-the-importance-of-diversification/#comment-117068 [...] form of diversification Every investment book I’ve read says that a smart investor diversifies his portfolio, putting some of his money into each of several different types of investments. I [...] [...] form of diversification Every investment book I’ve read says that a smart investor diversifies his portfolio, putting some of his money into each of several different types of investments. I [...]

]]> By: DonB http://www.getrichslowly.org/blog/2007/04/16/saving-and-investing-the-importance-of-diversification/#comment-83999 DonB Tue, 17 Apr 2007 03:14:15 +0000 http://www.getrichslowly.org/blog/2007/04/16/saving-and-investing-the-importance-of-diversification/#comment-83999 All that trouble to talk about diversification and it misses so much. The risk/return graphs like the one he showed briefly in the clip were a staple of Bernstein's <i>Intelligent Assent Allocator</i>. Bernstein makes a huge point though that isn't in the clip. Most of the benefit, i.e. most of the reduction in standard deviation, comes from periodic but not too frequent rebalancing. He recommended a rebalancing period of approximately 1-2 years. If you don't rebalance, you aren't reducing your risk as much as you think by diversifying. It's counterintuitive. If an investment has underperformed for the last 2-year period, it feels wrong to add yet more money to it to bring a portfolio to balance. But it is rebalancing that actually reduces the volatility of a portfolio the most. The reduction in standard deviation just doesn't come without it. Jim Cramer argues for rebalancing from a non-mathematical direction. Rebalancing forces us to sell high and buy low. We lighten up on the big performers to go back to the underperformers (who can expect to have their turn in the limelight eventually and we want to be there to catch it). All that trouble to talk about diversification and it misses so much. The risk/return graphs like the one he showed briefly in the clip were a staple of Bernstein’s Intelligent Assent Allocator.

Bernstein makes a huge point though that isn’t in the clip. Most of the benefit, i.e. most of the reduction in standard deviation, comes from periodic but not too frequent rebalancing. He recommended a rebalancing period of approximately 1-2 years.

If you don’t rebalance, you aren’t reducing your risk as much as you think by diversifying. It’s counterintuitive. If an investment has underperformed for the last 2-year period, it feels wrong to add yet more money to it to bring a portfolio to balance.

But it is rebalancing that actually reduces the volatility of a portfolio the most. The reduction in standard deviation just doesn’t come without it.

Jim Cramer argues for rebalancing from a non-mathematical direction. Rebalancing forces us to sell high and buy low. We lighten up on the big performers to go back to the underperformers (who can expect to have their turn in the limelight eventually and we want to be there to catch it).

]]> By: Bill http://www.getrichslowly.org/blog/2007/04/16/saving-and-investing-the-importance-of-diversification/#comment-83997 Bill Tue, 17 Apr 2007 03:02:33 +0000 http://www.getrichslowly.org/blog/2007/04/16/saving-and-investing-the-importance-of-diversification/#comment-83997 Saving and Investing is an all important topic and has been for the past ten years or more. The former concept has drifted too low for the average American worker. In my opinion, it is a good idea to combine investing into a capital accumulation program, particularly for younger investors. On diversification, I have seen a little too generalizations in my experience on the Street. Just from sitting in on various forums you get a sense that the average investor needs guidance on how to customize their allocations and not over fragmentize their holdings. Risk has a lot to do with knowing what works and what doesn't. I think Michael's statements are good. However, I am convinced that diversification, as an investment panacea, has put people to sleep. In my view, education and systematic monitoring of positions (single issues and/or funds) are the most effective way to manage risk and beat the broad markets. Saving and Investing is an all important topic and has been for the past ten years or more. The former concept has drifted too low for the average American worker. In my opinion, it is a good idea to combine investing into a capital accumulation program, particularly for younger investors. On diversification, I have seen a little too generalizations in my experience on the Street. Just from sitting in on various forums you get a sense that the average investor needs guidance on how to customize their allocations and not over fragmentize their holdings. Risk has a lot to do with knowing what works and what doesn’t. I think Michael’s statements are good. However, I am convinced that diversification, as an investment panacea, has put people to sleep. In my view, education and systematic monitoring of positions (single issues and/or funds) are the most effective way to manage risk and beat the broad markets.

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