IFA Radio's Episode 33

IFA Radio
Friday, August 13, 2010

Diversification has always been one of the major topics of this show. Diversification is what lower the risk in your portfolio. So how important is it? Well, I have some year to date numbers (as of Tuesday, August 10, 2010) to share with you across some various asset classes. These numbers will illustrate why it is important to be spread across all the asset classes across thousands of companies and stocks.
International Value: Up 0.2%
Emerging Markets Small Companies: Up 10%
Real Estate: Up 10.8%
Large Company (like the S&P 500): Up 1.7%
So why am I giving you these numbers? They obviously cannot tell you anything about where the market is going. But what they can tell you is returns in various asset classes are all over the board. 6 months from now International Value could skyrocket while Real Estate plummets. But by owning all of them, they can cover each other when one goes up and the other goes down. Jack Bogle talks about people who are searching for that needle in a haystack. He recommends buying the whole haystack. That way you know you got the winner.
Obviously a full equity portfolio is not for everyone. You really need to take a risk capacity survey in order to find what mix of equities and bonds is right for you. Someone in their 70s should not be invested 100% in equities since they are retired or close to retiring.
But regardless of how much of your money is in equities, it is important to make sure it is in passively managed index funds. Here is a table that contrasts the basic aspects of investing and how Active and Passive differ.
At the end of the day, Active investors believe they are in control. They delude themselves into thinking they have a special understanding of the market, a superior edge over less knowledgeable investors, making them immune to disaster. The truth is all investors can access the same information as professional money managers through the Internet and many other sources. Still, many investors believe they are smarter and more sophisticated than the average investor. Those under this illusion fail to realize how much investment performance depends on luck. Most of them eventually pay dearly for this mistake.
 

 

 

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