Assume that you have a choice of investing in a very wide range of assets – Developed market blue chips, developed market international mid cap, US value stocks, Europe Growth stocks, Asean Bluechips, Indian Bluechips, Indian midcap, India value fund, ….and you have invested in them.
Chances are when you are looking at this portfolio there would be some which are in the black and some are deep in the red. In fact if you have portfolio all in the black, it means the diversification has not been good. Remember one day it can all be in the red. Exactly the reason why you need debt, equity, gold and REITS. So a multi geography, multi industry, portfolio is more likely to be successful over a long run rather than a concentrated one country portfolio. Consider cross border investing if your portfolio is in excess of US $ 1 million.
The paradox is that you have to say sorry to your portfolio many times especially in a one country bull run!! Fairly obviously if you had included metals in your portfolio..the last couple of years gold would have looked bad, and you would have felt ‘if i had just sold gold and invested in equities…’. So diversification is paradoxical because with hindsight you think you could have done better – however with retrospective sight, everybody has 20/20 sight, do we not?
The problem is actually behavioral. When we say that out of 10 items in the portfolio, and 2 are not working, out mind works on those 2 ignoring the other 8. The truth is that over all you are doing well – if 80% of your portfolio is doing well, you should concentrate on that 80% THAT YOU DID RIGHT. Sadly, we look at those 2 items and kill ourselves for investing in gold, or in a China #ETF.., and this is AVOIDABLE. Yes diversification means asking for a PORTFOLIO that is performing not ALL items in the portfolio performing well. If Hul does not perform well for 3 quarters, does it mean the the management is spending too much money on advertising? or that the quality of management has deteriorated ?
The main aim of a portfolio is to make sure that it meets the goal for which was constructed. So even in a time when all the components of the portfolio are doing badly, do not attempt a cut here and there. Just see if you are on target to achieve your goals.
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