Counterintuitively, when I focus hard on not losing money, I become too risk averse, I fail to take appropriate risk, and my returns are stuck in the low single digits.
I can't count the times I sold great companies like Apple and Netflix and Tesla years too early because I was afraid to lose money and wanted to "lock in" a 50% gain.
By focusing on potential for high returns instead of not losing money, with a diverse portfolio of assets that don't correlate perfectly with each other, total returns are much greater even though individual bets can show big losses for months or years.
This is where a diversified portfolio makes sense. It's completely fine to take a "big bet" on what would amount to a years worth of returns/cash investment every now and then. But many great opportunities have already been priced appropriately, so the extra concentration of risk doesn't yield a great return.
If one was to be able to simply select the 50% of companies which perform better than the rest of the field. You would be in good shape.
THIS. As much as I wish I put all my money into NVDA when I bought it, I’m happy to have a lot of diversity in high tech IT. The daily swings are not nearly as bad and aim not biting my fingers all day long.
Sure, but not diversifying is also one of the most efficient ways to go broke. Which is something that diversifying will make much more difficult.
Also, full baloney. I was not diversifying for many years and it indeed made me great money (thanks MSFT). But when I started getting spooked and diversified, guess what?
I still ended up doing pretty well, even if it wasn’t on the same level as before (look up MSFT share price change between the start of 2017 and 2021). But it was so much safer and reliable, going broke wasn’t as much of a concern, and I knew I was much more secure in case of a downturn. Winning on risky triple digit percentage gains feel great, but I would rather take much safer diversified 50-60% gains over a 3 year period instead.
Not saying that those 50-60% gains are even close to what I would expect from truly safe plays. But safety and risk is a spectrum, and you have more choices than just “fully diversified super safe index funds” and “all-in on one single ticker.” You can adjust and make things diversified and safer than all-inning on a single ticker, while still maintaining some amount of risk that would allow for outsized gains.
I am not saying anything that you are attempting to dispute here... Your logic is sound and you can get rich doing it. But you won't get wealthy. And getting wealthy does carry higher level of risk, I would think that is common sense.
To me diversification goes against all logic because the rule #1 of investing should be that you as a investor KNOW what you are investing in. You can't tell me anyone investing in say S&P 500 has done extensive research on each every of the 500 companies. All they are hoping for is "hey, these are 500 biggest companies in the World, imma just put my chips here and hope for the best - history tells me that is probably safe bet."
On the other hand, you can do full-on research into a single or handful of companies and then put your chips there. You can't tell me that putting money in Magnificent-7 say 5 years ago was any riskier than putting money into S&P 500... and yet you could have gotten REALLY wealthy with the former and quite rich with the latter...
> To me diversification goes against all logic because the rule #1 of investing should be that you as a investor KNOW what you are investing in.
I largely agree with what you say. However, diversification has degrees, and it doesn’t necessarily mean that you gotta spray and pray across the whole range of S&P500 to be more diversified than the “all-in on a single stock ticker” strategy. Examples:
* All in one single stock ticker - no diversification
* All in a few different stock tickers that are in the same industry sector (that you are knowledgeable about) - diversified businesses, but not diversified across industries
* S&P500 spray and pray - largely diversified
Option #2 is imo the solid middle ground, and it gels perfectly fine with your idea that you gotta know what you invest in. Yes, it is riskier than option #3, because it doesn’t account for the scenario where the entire industry sector experiences a downturn. But it is still diversified, still has the potential to make you wealthy, and is not nearly as risky as option #1 (but also not as capped as option #3).
Wealthy folks aren't diversified, because they have _control_ (and knowledge) over their particular investment (ie company founders).
Stock investors do not have the luxury of control, thus they must diversify.
And generally that's what the wealthy do. They go all-in on their own company, grow it to incredible returns, then use those returns to be invested in a diversified manner to grow further. Other stocks, realestate, angel investing, etc.
Most of the billionaires are like this. Or if you're Warren Buffet, you invested in a diversified manner, because he didn't control the companies he owned.
> Or if you're Warren Buffet, you invested in a diversified manner, because he didn't control the companies he owned.
you should check out Buffet's portfolio - he's not very diversified at all... If that was your portfolio someone would tell you you are nuts/gambler/...
It's impossible to lose money you don't bet. I don't understand this mentality. If you have a 30k portfolio... fine bet the 5-10k... even if you lose it you're fine.
> I can't count the times I sold great companies like Apple and Netflix and Tesla years too early because I was afraid to lose money and wanted to "lock in" a 50% gain.
Ah the sunk cost fallacy. Having an exit strategy is important. Never beat yourself up for an appropriate exit strategy.
FYI: This isn't a case of the sunk cost fallacy. The sunk cost fallacy involves continuing an investment due to the amount already invested, regardless of future potential. What you're describing is more related to regret aversion and hindsight bias.
Counterintuitively, when I focus hard on not losing money, I become too risk averse, I fail to take appropriate risk, and my returns are stuck in the low single digits.
I can't count the times I sold great companies like Apple and Netflix and Tesla years too early because I was afraid to lose money and wanted to "lock in" a 50% gain.
By focusing on potential for high returns instead of not losing money, with a diverse portfolio of assets that don't correlate perfectly with each other, total returns are much greater even though individual bets can show big losses for months or years.