Diversification

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yousha
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Diversification

Post by yousha » Sat Aug 18, 2018 3:26 pm

I never understood the logic that in order to prove one is diversified is to have a fund or two losing money for the year as others are making money in terms of fund appreciation in fund price. If this is correct....why? If all are in positive territory at any given point in the year....then you are not diversified or diversified enough. Sounds crazy to me. I guess an example would be the Total Stock Market vs. The total International Stock Market. I'd rather have them both go up in price

delamer
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Re: Diversification

Post by delamer » Sat Aug 18, 2018 3:29 pm

I have never heard anyone assert that some of your assets have to lose money (in a year) in order to prove you are diversified.

Can you provide a link to such a statement?

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catdude
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Re: Diversification

Post by catdude » Sat Aug 18, 2018 3:30 pm

Diversification reduces volatility in your portfolio. It's for people who don't like emotional and financial roller-coaster rides.
catdude | | All generalizations are false, including this one.

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vineviz
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Re: Diversification

Post by vineviz » Sat Aug 18, 2018 3:31 pm

yousha wrote:
Sat Aug 18, 2018 3:26 pm
I never understood the logic that in order to prove one is diversified is to have a fund or two losing money for the year as others are making money in terms of fund appreciation in fund price. If this is correct....why? If all are in positive territory at any given point in the year....then you are not diversified or diversified enough. Sounds crazy to me. I guess an example would be the Total Stock Market vs. The total International Stock Market. I'd rather have them both go up in price
I doubt anyone would argue that the only true mark of a diversified portfolio is that some funds will be in "negative territory" at any given time.

That said, the goal of portfolio diversification is to spread your risks across multiple independent factors. By definition, that means a diversified portfolio includes assets that do NOT always move in lockstep with each other. We'd all like every fund we own to go up all the time, but that's not the way investable assets work.

So the goal of diversification is to make sure all your assets don't go DOWN at the same time. That inevitably means that SOMETIMES when one is up, another is down.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

ResearchMed
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Re: Diversification

Post by ResearchMed » Sat Aug 18, 2018 3:38 pm

delamer wrote:
Sat Aug 18, 2018 3:29 pm
I have never heard anyone assert that some of your assets have to lose money (in a year) in order to prove you are diversified.

Can you provide a link to such a statement?
Ditto.

In fact, I "understood" that diversification would mean that some funds/asset classes would "perform better than others", and that the "price" of diversification meant that one would get "less appreciation" of some funds/asset classes than others.

In this case, "less appreciation" might mean an actual loss, but could often mean just what one thinks of: a smaller positive gain.

Note: "appreciation" here means any increase, from share appreciation to additional increase from dividends/cap gains, etc.

RM
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iceport
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Re: Diversification

Post by iceport » Sat Aug 18, 2018 3:47 pm

Sounds like a butchered version of a Peter L. Bernstein quote:

"You're not truly diversified until you own something that you're really uncomfortable with."
"Discipline matters more than allocation.” ─William Bernstein

yousha
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Re: Diversification

Post by yousha » Sat Aug 18, 2018 3:51 pm

My experience has been that when the total Stock Market goes down most times the total international stock market goes down as well (lockstep).

Any thoughts?

MotoTrojan
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Re: Diversification

Post by MotoTrojan » Sat Aug 18, 2018 3:59 pm

yousha wrote:
Sat Aug 18, 2018 3:51 pm
My experience has been that when the total Stock Market goes down most times the total international stock market goes down as well (lockstep).

Any thoughts?
Not usually by the same amount. Look at 1, 5, 10 year charts and it’ll be obvious they don’t move together entirely.

PFInterest
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Re: Diversification

Post by PFInterest » Sat Aug 18, 2018 4:07 pm

yousha wrote:
Sat Aug 18, 2018 3:26 pm
I never understood the logic that in order to prove one is diversified is to have a fund or two losing money for the year as others are making money in terms of fund appreciation in fund price. If this is correct....why? If all are in positive territory at any given point in the year....then you are not diversified or diversified enough. Sounds crazy to me. I guess an example would be the Total Stock Market vs. The total International Stock Market. I'd rather have them both go up in price
you should go read the wiki in diversification. there is no proof required that one loses as the other gains.

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arcticpineapplecorp.
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Re: Diversification

Post by arcticpineapplecorp. » Sat Aug 18, 2018 4:12 pm

yousha wrote:
Sat Aug 18, 2018 3:26 pm
I never understood the logic that in order to prove one is diversified is to have a fund or two losing money for the year as others are making money in terms of fund appreciation in fund price. If this is correct....why? If all are in positive territory at any given point in the year....then you are not diversified or diversified enough. Sounds crazy to me. I guess an example would be the Total Stock Market vs. The total International Stock Market. I'd rather have them both go up in price
Perhaps you're thinking of the quote:
"Diversification means always having to say you're sorry."

That means that if you're truly diversified you may have one asset (or asset class) either going down or not going up as much as another (or others). I think that makes sense to me (and not "crazy" as you say) for the following reasons:

1. You never know in advance which assets (or classes) are going to do the best (look here: https://www.callan.com/wp-content/uploa ... d_2018.pdf). After looking at that patchwork quilt, do you think you can really predict what will be the best asset/asset class for 2018, 2019 and so on? Didn't think so.

Another good example is how people keep bemoaning international stocks, but in 2017 the total international stock market index fund OUTPERFORMED the total US stock market index fund (by 6.4%). You don't have to take my word for it. Look right here: https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

2. To say "I'd rather have them both go up in price", well, duh. But doesn't that mean if they're both going up together, they'd have to go DOWN together too? Do you really want that? Didn't think so.

3. Don't you want some assets to go down in price so you have something to buy on sale? If everything you own only goes up, how do you get to buy on the dips?

If you're a retiree, sure you want everything to go up and only up. But if you're an investor, you should want things to go down. That's what you want to buy, not things that go up. Think about it.
"Invest we must." -- Jack Bogle | “The purpose of investing is not to simply optimise returns and make yourself rich. The purpose is not to die poor.” -- William Bernstein

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JoMoney
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Re: Diversification

Post by JoMoney » Sat Aug 18, 2018 4:18 pm

Most of the benefit of "Diversification" comes from the returns on the assets being uncorrelated. If they tend to go in the same direction, you're not getting that.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

ResearchMed
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Re: Diversification

Post by ResearchMed » Sat Aug 18, 2018 4:20 pm

arcticpineapplecorp. wrote:
Sat Aug 18, 2018 4:12 pm
yousha wrote:
Sat Aug 18, 2018 3:26 pm
I never understood the logic that in order to prove one is diversified is to have a fund or two losing money for the year as others are making money in terms of fund appreciation in fund price. If this is correct....why? If all are in positive territory at any given point in the year....then you are not diversified or diversified enough. Sounds crazy to me. I guess an example would be the Total Stock Market vs. The total International Stock Market. I'd rather have them both go up in price
Perhaps you're thinking of the quote:
"Diversification means always having to say you're sorry."

That means that if you're truly diversified you may have one asset (or asset class) either going down or not going up as much as another (or others). I think that makes sense to me (and not "crazy" as you say) for the following reasons:

1. You never know in advance which assets (or classes) are going to do the best (look here: https://www.callan.com/wp-content/uploa ... d_2018.pdf). After looking at that patchwork quilt, do you think you can really predict what will be the best asset/asset class for 2018, 2019 and so on? Didn't think so.

Another good example is how people keep bemoaning international stocks, but in 2017 the total international stock market index fund OUTPERFORMED the total US stock market index fund (by 6.4%). You don't have to take my word for it. Look right here: https://quotes.morningstar.com/chart/fu ... A%5B%5D%7D

2. To say "I'd rather have them both go up in price", well, duh. But doesn't that mean if they're both going up together, they'd have to go DOWN together too? Do you really want that? Didn't think so.

3. Don't you want some assets to go down in price so you have something to buy on sale? If everything you own only goes up, how do you get to buy on the dips?

If you're a retiree, sure you want everything to go up and only up. But if you're an investor, you should want things to go down. That's what you want to buy, not things that go up. Think about it.
I'll take minor issue with the last part.

IF asset classes "always went up", such that there were no "dips" to buy, that would be fine, too.

After all, although the new purchases might "cost more" than if there were dips (and *if* one actually managed to buy during those dips and not before/after), the increasingly large portfolio value would be monotonically increasing, never needing to "recover".

I'd take that.

Now, if the market wasn't going up monotonically, yes, that changes things, but I'm responding to the generality that a pre-retiree investor "should" want things to go down.

RM
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TD2626
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Re: Diversification

Post by TD2626 » Sat Aug 18, 2018 6:00 pm

JoMoney wrote:
Sat Aug 18, 2018 4:18 pm
Most of the benefit of "Diversification" comes from the returns on the assets being uncorrelated. If they tend to go in the same direction, you're not getting that.
This is ultimately a matter of correlation and correlation coefficients. US and International stocks have a positive, and relatively high, correlation. However, it isn't 1.00 --- so there would be some benefit to diversifying in theory.

acegolfer
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Re: Diversification

Post by acegolfer » Sat Aug 18, 2018 8:48 pm

TD2626 wrote:
Sat Aug 18, 2018 6:00 pm
JoMoney wrote:
Sat Aug 18, 2018 4:18 pm
Most of the benefit of "Diversification" comes from the returns on the assets being uncorrelated. If they tend to go in the same direction, you're not getting that.
This is ultimately a matter of correlation and correlation coefficients. US and International stocks have a positive, and relatively high, correlation. However, it isn't 1.00 --- so there would be some benefit to diversifying in theory.
yes, StDev of a portfolio of 2 stocks <= average of 2 StDevs, while return of a portfolio of 2 stocks = average of 2 returns.

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