Syndicate
Not Over Diversifying One's Portfolio
A number of studies have been done regarding portfolio diversification in order to minimize risk and everyone concludes that the reasonable minimum number, which is close to the risk of a much diversified portfolio, is of 5 titles. It was concluded that the risk of a diversified stock portfolio reaches asymptotic values in a number of 18 stocks. Other studies that have been made concluded that a portfolio of 5 stocks had the same risk that portfolios of up to 60 stocks had. It has been demonstrated that the risk of a portfolio of five stocks is twenty five, measures as standard deviation, and for one thousand stocks it was twenty. In other words, the risk would only go down in a twenty percent by increasing one’s diversification by two hundred times. Therefore, it is concluded that it is preferable to diversify in portfolios of smaller stocks chosen in different business areas but that are well managed. In actuality, with the available technology we have to administrate portfolios, it is easy to fall in the temptation of investing in a number of different stocks, which in the end, is unnecessary if one wants to diversify risk. If all the favorite are followed, but only a fixed number of them are invested into, for example ten, we will not be able to avoid that more than one that we have not chosen for our portfolio will suddenly jump towards an unpredictable maximum price. Humanly it will provoke one to be in all the stocks that the procedure we are applying indicates to us, since we will not be able to know which of all of them is pure gold, but on the other hand, we will know rationally that it is not necessary to be in all of them. It is recommended therefore to mange oneself by trying to have in our stock portfolio the ones that are the most attractive and have around five to ten at most, chosen by different sectors of activity.
Do not despair; there will always be new stock market opportunities
Many times it will have happened to us that for the different reasons we stay out of the market and are not able to make a decision about our buying position, right at the moment in which that stock was sure to evolve in the raise. We will once again tell ourselves that Murphy’s Law has gotten back at us, while we see overwhelmed how everyone that bought, are celebrating their decision. We will also feel that we have lost the last opportunities of getting into the success vehicle. In reality, all of the previous is nothing more than the expression of the trap of emotions, since there will always be new equal opportunities in the market or better ones that can be taken advantage of. Everyday new stock cycles come about with price inertia, and even though the general development of the stock market is prosperous or feeble, cycles will never stop existing since, due to their nature, it is definitely a game that will never be able to end.