Diversifying investment portfolio

galumay said:

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!

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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.

QuietGrowth said:

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.

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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:

QuietGrowth said:

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

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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.

DeepState said:

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.

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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.

QuietGrowth said:

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.

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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.

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

skyQuake said:

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

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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.

skyQuake said:

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

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Its available as a PDF if you hunt around.