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Just a few thoughts here:
Lots of our members talk about diversification. And I agree with the thought; diversification can save your butt!
But the term 'diversification' can mean a lot of things, and not all of them require you to own lots of different stocks.
I say I am diversified. But I only own 2 stocks. NVTA, which was up 21% last year and BEAT, which was up 100%. I did not sell last year (in fact I bought more NVTA) and probably won't this year, either. My diversification lies in the fact that we keep plenty of cash in a CD, less money in a money market account, and our income is derived from real estate holdings, which are mortgage free. We have plenty of cash flow to maintain our lifestyle.
My investment activity is an attempt to make a permanent positive change in our lifestyle. At a certain point in my investment portfolio (the 2 stocks), I will begin to sell gradually. I will be able to take advantage of long-term capital gain provisions and add money to our money market fund to pay for vacations, maybe a new car, and so forth.
And where is that "certain point"? Actually, it has already started. This month I took my wife to a luxury spa as a surprise. I don't need to sell any stock to pay for it, but I do need to take some money out of the money market account, and I know I can easily replace that money if I need to. Hopefully, next year I will have taken her to the Bahamas for a week or maybe something else special. And so on and so forth.
And HOPEFULLY(!) I will be lucky enough and wise enough to make more money in appreciation each year than I am taking out for these special events.
If I am able to add 20,000/year to our income I will consider myself successful; if I am able to add 50,000/year to our income I will consider myself lucky AND successful. Anything more that that is just damned good luck.
You diversify to protect against a greater number of risks. You diversify in order to benefit from a greater number of opportunities. You allocate based upon expectations and a risk exposure you are comfortable with.
Just a few thoughts here:
Lots of our members talk about diversification. And I agree with the thought; diversification can save your butt!
But the term 'diversification' can mean a lot of things, and not all of them require you to own lots of different stocks.
I say I am diversified. But I only own 2 stocks. NVTA, which was up 21% last year and BEAT, which was up 100%. I did not sell last year (in fact I bought more NVTA) and probably won't this year, either. My diversification lies in the fact that we keep plenty of cash in a CD, less money in a money market account, and our income is derived from real estate holdings, which are mortgage free. We have plenty of cash flow to maintain our lifestyle.
My investment activity is an attempt to make a permanent positive change in our lifestyle. At a certain point in my investment portfolio (the 2 stocks), I will begin to sell gradually. I will be able to take advantage of long-term capital gain provisions and add money to our money market fund to pay for vacations, maybe a new car, and so forth.
And where is that "certain point"? Actually, it has already started. This month I took my wife to a luxury spa as a surprise. I don't need to sell any stock to pay for it, but I do need to take some money out of the money market account, and I know I can easily replace that money if I need to. Hopefully, next year I will have taken her to the Bahamas for a week or maybe something else special. And so on and so forth.
And HOPEFULLY(!) I will be lucky enough and wise enough to make more money in appreciation each year than I am taking out for these special events.
If I am able to add 20,000/year to our income I will consider myself successful; if I am able to add 50,000/year to our income I will consider myself lucky AND successful. Anything more that that is just damned good luck.
I hope this helps someone, somewhere.
So, just to let you know, you ARE NOT diversified. In fact you are 9/10th of the definition of concentrated. Both of your positions are healthcare related, one in provider services and the other in bio-technology, but both in the HEALTHCARE sector. In fact you state that you opened a position (concentrated) and then purchased more making your concentration ever more focused vs. your overall exposure.
So, just to let you know, you ARE NOT diversified. In fact you are 9/10th of the definition of concentrated. Both of your positions are healthcare related, one in provider services and the other in bio-technology, but both in the HEALTHCARE sector. In fact you state that you opened a position (concentrated) and then purchased more making your concentration ever more focused vs. your overall exposure.
Thanks.
But what I am saying is I don't think the the classical definitions of diversity are helpful. So I discarded them and made an investment plan that suits me.
"Diversified" means rolling your money in lots of socks. Stocks. Bonds. Real Estate. Currencies. Metals. If you depend on investments for income, something will always be up in a diversified portfolio.
diversified means using not only different categories of assets but assets that are not correlated and when one zigs the other zags .
you may have large caps ,small caps ,mid caps and foreign stocks but that is a bet on prosperity no matter what and while it is diversified among equities it lacks true diversification .
if nothing is going down the days of these big stock rally's you are not truly diversified .
diversified means using not only different categories of assets but assets that are not correlated and when one zigs the other zags .
you may have large caps ,small caps ,mid caps and foreign stocks but that is a bet on prosperity no matter what and while it is diversified among equities it lacks true diversification .
if nothing is going down the days of these big stock rally's you are not truly diversified .
Not sure what you said, there.
Are you saying BIG STOCK rallies, or BIG stock rallies?
My two stocks are both small caps. Our real estate is in an area where prices are stable. In fact, we did not feel the '08 recession in terms of property value. Money kept in CD and money market is there to provide a solid cash foundation for my wife in case a meteor falls on me.
I don't see any massive moves coming in the general market; looks like it's going to go sideways for a while. And 'sideways' is fine with me. I can live with that. I take any selling cues from the numbers reported on the 10Q's. Things like a sharp reduction in revenue trajectory or something of that nature would prompt me to sell.
on the big up days for ALL stocks if something in another asset class is not down then you are not diversified .
what most people call diversified are simply assets that depend on low inflation and prosperity to do well .
we still have recession ,depression and high inflation to deal with when you are really diversified . a diversified portfolio is something like the harry brown permanent portfolio that can do well in any outcome except temporarily in a tight money scenario .
you have long term treasuries for recession and depression , you have gold for a weak dollar and very high inflation .
to have enough lifting power a conventional portfolio would need 70% in a total bond fund to support and prop up 30% stocks in a down turn .. that is a crazy high amount plus it offers no high inflation / weak dollar protection .
What percentage of your net worth do your two stocks represent?
That's a good question and rather than let it hang there in the air I should make a stab at a reply:
15% is the answer. But it is more involved than that.
We have 5 streams of income. Two of them are Social Security so they are solid. The other 3 are real estate rentals and not quite as solid. We live off 80% of our monthly income. That way, when one source fails (as it has) it doesn't result in any problem in The Listener household. There is plenty of money in the money market to take care of any emergencies that may come along.
So my stock market activities are an attempt to create a little lagniappe for our efforts in life. I have not picked my investment companies casually. Most of my working life was spent in business, so I am familiar with balance sheets, quarterly reports, sales analysis and spread sheets. I used what I have learned and created a spread sheet format that showed me what I felt I needed to know. Then I went looking for growth stocks. And that's how I ended up with BEAT and NVTA. I probably dismissed hundreds of other choices before finding two that I though were acceptable.
The ego-driven goal is that I would like for those two stocks to make up 50% on my net worth. I have no idea when or if that will happen, but there's my thought.
The reason I am telling you all this, is because I would not want some youngster to misunderstand my position and go out half-cocked thinking that Listener said to just buy two stocks. We feel as though we have created a financial fortress, and I want to encourage everyone to think in those terms.
BOL
An Aside: Bill Gates has $20B in Microsoft stock, and a net worth of $95B. Jeff Bezos has $135B in Amazon stock, and that is equal to his net worth. Brin Sergey has $20B in Google stock; his net worth is $52B. No one thinks to question those guys about their lack of diversity, because after a certain point it doesn't matter. But you need to get to that point first.
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