Overtrading: 6. Not Diversifying
Overtrading: 6. Not Diversifying
OVERTRADING
6. NOT DIVERSIFYING
People prefer picking winners and betting it all. The possibility of making
a lot of money in a short amount of time attracts many people to this
strategy. Think: the lottery.
In most years, a diversified portfolio rarely beats the absolute
performance of the best performing market(s) or stock(s). Consistent
underperformance in the short-term can be too much to bare for some
investors. So, rather than striving for steadier long-term results by
building a portfolio of
different markets and
strategies, they
REAL
STOCKS
choose to move all
ESTATE
REAL
STOCKS
of their money from
ESTATE
one market to the
COMMODITIES
CURRENCIES
next attempting to
BONDS
catch a big winner.
CASH
CASH
BONDS
This strategy
inherently places
more emphasis on
market-timing
old school
new school
instead of
diversification.
LONG ONLY
LONG AND SHORT
BENEFITS OF DIVERSIFICATION:
Rather than trade one market and experience all of the swings in that
instrument, diversifying helps create a smoother ride.
By having a large number of markets in the portfolio, you can ride the
ones on the move and avoid the choppy ones
Risking a small amount on each position, you do not have to win on
every trade. You can still win even with 30-40% winners.
TV and online personalities pitch their ideas every single day. Their job
is to get you to tune in. Their strategy is selling certainty - making you
believe they know what's coming next. Investors without a plan of their
own become susceptible to falling hard for convincing stock picks
- jumping from one idea to the next.
Media only focuses on 1) what markets
to trade and 2) when to enter. They
never talk about position sizing or exit
methodology to protect your capital
if/when the market goes against you.
Investors must not concerned with pie
in the sky ideas. They first must have a
plan of their own and then be able to
tune out other people's opinions. When
you have a plan, you already have all you need to be successful.
1. Portfolio Construction
Knowing what markets or stocks to invest in.
2. Risk Management
Knowing how much capital to risk on each
investment.