Everyone has their own goal and approach to managing wealth and entering the financial markets. I cannot tell anyone how diversified to be because everyone has their own tolerance for risk and volatility.
If you are looking for “market returns†and have no interest in trying to achieve higher returns, a low cost index fund may be your best bet. If you simply dollar cost average into a set of index funds tied to different stock universes (large cap, small cap, international) you have a good chance of doing as well as most investors.
In the same vein, if you adhere to asset allocation and “re-balancing strategyâ€, it is hard to get into too much trouble, or outperform the market… For everybody looking for higher returns, diversification and asset allocation are over-rated, just ask Warren Buffet. This concept is covered more in-depth in my most recent book, The Magnet Method of Investing (Wiley).
For a more thorough discussion on this subject, watch my video below.
One of the most important rules of investing for higher returns is to “cut your losses short and let your profits runâ€, which this is completely contrary to re-balancing an asset allocation strategy.
Understanding the concept of the bell curve, it is obvious that 90% of everything measurable is average. Then there is the 5% on each end of the bell curve. Your willingness to invest in the “good outliers†and “short the bad outliersâ€, the way I use in the Magnet approach, you can potentially create the “alpha†the investment world craves.
The right amount of asset allocation and diversification you use should depend on you, not flawed studies from 50 years ago.
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