Diversifying investment portfolio

[QuietGrowth]

Its not definitive, it MAY give you better returns. Thats all you can say with any certainty. Diversification is always a double edged sword, there are ample arguments against diversification for diversifications sake.

If you are good enough then your universe of companies invested in should be very small indeed - potentially just one. Its self evident this will maximise your returns - if you are good enough and have sufficient confidence in your skill!

Yes, if you know more than the market, that is, you can predict correctly, then yes, diversification is meaningless. You have that one single winner stock, and it will make you a winner.

Now the moot question is: do we really know who is that future winner?

Almost always, we do not. -> Unless we know more than the market.

This is what Efficient Market Hypothesis is all about. Hence the case for diversification.

 

[DeepState]

Yes, if you know more than the market, that is, you can predict correctly, then yes, diversification is meaningless. You have that one single winner stock, and it will make you a winner.

Now the moot question is: do we really know who is that future winner?

Almost always, we do not. -> Unless we know more than the market.

This is what Efficient Market Hypothesis is all about. Hence the case for diversification.

Hi Dilip, nice to have an(other) informed posted join ASF. As I mentioned in another post, please respect that ASF is not a platform for sourcing clients for financial advice or services including funds management.

Galumay is correct.

When you make this claim:

...this approach will give you better returns in the long-run compared to simply investing in few favourite index funds.

It does not require superior knowledge of the market for a concentrated portfolio of whatever to beat a fine-tuned portfolio of ETFs. There is a probability distribution. Over any worthwhile and relevant investment horizon, some random selection of ETFs has a non-zero and often meaningful chance of outperforming in straight out return space.

... Unless you are claiming to have a massive edge in asset allocation, which would be at odds with a highly diversified portfolio which is rebalancing via threshold rules.

 

[QuietGrowth]

Galumay is correct.

It does not require superior knowledge of the market for a concentrated portfolio of whatever to beat a fine-tuned portfolio of ETFs. There is a probability distribution. Over any worthwhile and relevant investment horizon, some random selection of ETFs has a non-zero and often meaningful chance of outperforming in straight out return space.

... Unless you are claiming to have a massive edge in asset allocation, which would be at odds with a highly diversified portfolio which is rebalancing via threshold rules.

Yes, probability distribution exists. Hence there is a non-zero probability of beating a fine-tuned portfolio of ETFs, the reason involving skill and/or chance.

Yes, galumay is correct. There will always be instances that satisfy what he stated. For sure. However, one cannot deny the case for the benefits of diversification.

 

[galumay]

Yes, probability distribution exists. Hence there is a non-zero probability of beating a fine-tuned portfolio of ETFs, the reason involving skill and/or chance.

Yes, galumay is correct. There will always be instances that satisfy what he stated. For sure. However, one cannot deny the case for the benefits of diversification.

Its probably worth your while reading this thread in its entirety, there is some really good discussion about the pros and cons of diversification. I think its become a bit of a buzzword and something that people just accept as being beneficial without any deeper understanding.

Also in your previous post you mention the Effecient Market Hypothesis, I think that it is widely accepted now that it is a false hypothesis.

 

[skyQuake]

A bit off topic but has anyone read "Poor Charlie's Almanack?"
https://www.poorcharliesalmanack.com/pca.php
No kindle version so it has to be shipped from the US for a pretty (outrageous) sum

 

[McLovin]

A bit off topic but has anyone read "Poor Charlie's Almanack?"
https://www.poorcharliesalmanack.com/pca.php
No kindle version so it has to be shipped from the US for a pretty (outrageous) sum

Yes. It's a big book, more like a coffee table book than a read in bed book. It's worth reading though. Munger is a different sort of thinker to Buffet, or Buffet synthesises his thinking differently.

 

[galumay]

A bit off topic but has anyone read "Poor Charlie's Almanack?"
https://www.poorcharliesalmanack.com/pca.php
No kindle version so it has to be shipped from the US for a pretty (outrageous) sum

Its available as a PDF if you hunt around.