Depending upon where you count the end of the week, I have not missed my goal. I still count Saturday as the last day of the week, so this makes two.
Where we left off, we had broken out the investing definition into a few different categories. The first one was “investing to make money”. And I suppose that particular definition is the one I had when I started investing myself. And probably still is.
However, investing is not without it’s risks. You can lose your whole investment if you are not careful. This is the reason the diversification principle is touted. Without getting too technical, you spread the risk among several investments. Some do well, others don’t, but you end up earning an “average” rate of return, so you made a little money. Over time that interest compounds, and you have made even more money.
Basically, if you are investing to be wealthy, and are using “proper” diversification, you better have a lot of money to invest to begin with.
Our wealthiest citizens did not become wealthy because of diversification. They became wealthy because of concentration. Now I know you will all be aghast at these words. “What? But everybody says I need to diversify!”. And those people are correct, once you HAVE money. Diversification does a good job of steadily growing your money and hopefully preventing large losses (although that didn’t really happen in this last recession).
Business owners (which is what you are when you own stock in a company), and those willing to take on more risk, are those that become wealthy in our society. Business owners pretty much concentrate all of their assets into one thing– the business. So in that respect, they are the furthest thing from diversified. Yet there is a large population of wealthy business owners. Of course, the statistics are horrible. Most small businesses fail within the first three years.
However, there is a continuum. Maybe buy five stocks (businesses). You mitigate your risk a little, but don’t inhibit your returns as much. Or ten, if five seems a little risky. Academic research has shown that you can receive most of the benefits of full diversification with 15 -25 stock positions. Yet most mutual funds (in your 401k) have hundreds of positions with small amounts.
PLEASE DO NOT CONSTRUE THIS BLOG AS INVESTMENT ADVICE. THEY ARE MUSINGS ONLY, BUT WILL HOPEFULLY MAKE YOU THINK. NOTICE THERE ARE NO SPECIFIC INVESTMENT IDEAS.
That said, talk to your financial advisor (or your spouse) about what your goals are. Remember, you can lose your entire investment no matter what you invest in. But upside (how much it gains) for the most part are unlimited. You can gain 400%, but you can only lose 100%.