Diversification and Balanced Investments

dboswell

What would you describe as a balanced portfolio?

Can an investor be over diversified?

wombat42_2

dboswell wrote: »

What would you describe as a balanced portfolio?

Can an investor be over diversified?

I personally go for a mix of very safe and risky and nothing in between. I have cash savings and i have commodity investments - I belive that commodities in the long term are a very good bet.

Twickenham_Green_FA

Yes you can be over diversified. Big believer in diversification, however if you want growth in your portfolio, you have to take some level of risk with a decent proportion of you funds.

Balanced would depend on the current economic climate and the current and future expectations of the markets, starting with the basic assets classes - cash, fixed interest (bonds), stock market funds, alternatives (commodities etc).

I don't tend to invest clients in property as their overall portfolio is already heavy weighted towards property with their main residence.

theGrinch

I agree with Brendan. If you over diversify you are reducing your risk but also your chances of out performing the market.

for example, you need to determine how much of your overall investments you be in equities and then determine which regions, sectors, company types etc.

Reaper

If you intend sticking your money into investments and then forgeting about it then diversification is important. Sectors go up and down so covering them all reduces risk.

However if you are willing to research, move money about and take some mild risks to improve returns then diversifying into poorly performing sectors is not such a good idea.

To give an example I recently set up a SIPP. I decided to put nothing into gilts because I don't think the future looks good for them. However if I was going to stick the money in and forget about it for 10 years then I would include them because they form a part of a balanced portfolio.

jon3001

theGrinch wrote: »

I agree with Brendan. If you over diversify you are reducing your risk but also your chances of out performing the market.

That's not necesssarily true. Roger Gibson examines portfolios in his book 'Asset Allocation'.
http://books.google.co.uk/books?id=q80oFFsiI3kC

Consider four asset classes:
A. Domestic Stocks (S&P 500)
B. International Stocks (MSCI EAFE Index)
C. Real Estate Securties (FTSE NAREIT Equity REITs Index)
D. Commodity-Linked Securities (S&P GCSI Index)

Between 1972 and 2005, an annually rebalanced portfolio consisting of ABCD (25% each) outperformed portfolios consisting solely of A, B, or D. Real Estate alone (C) had slightly higher returns (with much greater risk) but we know REITS have been disproportionately affected by the downturn in recent years.

This was also among the least risky portfolios in terms of standard deviation of returns.



Further reading:
http://www.tuveinvestments.com/pdf/Investing/AssetClass%20Investing.pdf

theGrinch

jon3001 wrote: »

That's not necesssarily true. Roger Gibson examines portfolios in his book 'Asset Allocation'.
http://books.google.co.uk/books?id=q80oFFsiI3kC

Consider four asset classes:
A. Domestic Stocks (S&P 500)
B. International Stocks (MSCI EAFE Index)
C. Real Estate Securties (FTSE NAREIT Equity REITs Index)
D. Commodity-Linked Securities (S&P GCSI Index)

Between 1972 and 2005, an annually rebalanced portfolio consisting of ABCD (25% each) outperformed portfolios consisting solely of A, B, or D. Real Estate alone (C) had slightly higher returns (with much greater risk) but we know REITS have been disproportionately affected by the downturn in recent years.

Naturally, you can find statistics for any book you wish to write, but perversely you confirm my point.

The crux here is what we mean by "diversification". Thats the key.

The inclusion of the four asset classes you cite is not over diversification in the slightest. In fact, I hold all four classes and more.

Simply, thats diversification. I would say overdiversification, in the context of the OP is for example the use of a dozen funds tracking UK equities, where a smaller number of the top performers would suffice. Again, a dozen funds tracking a similar (but slightly different) basket of commodities could be considered overdiversification.

You can have overdiversification between asset classes, but often it is within the asset class itself.

Twickenham_Green_FA

Reaper wrote: »

If you intend sticking your money into investments and then forgeting about it then diversification is important. Sectors go up and down so covering them all reduces risk.

[FONT=&quot]Sticking money into an investment and forgetting about it till you need it (i.e. retirement) is extraordinarily lazy and irresponsible (sorry if I offended anyone).

If you want your money to grow and become wealthier over time, you have to take a fairly active and sensible approach. Regularly reviewing is the key.[/FONT]

wombat42_2

Brendan_Bensley_IFA wrote: »

[FONT=&quot]Sticking money into an investment and forgetting about it till you need it (i.e. retirement) is extraordinarily lazy and irresponsible (sorry if I offended anyone). [/FONT]

[FONT=&quot]If you want your money to grow and become wealthier over time, you have to take a fairly active and sensible approach. Regularly reviewing is the key.[/FONT]

But on the other hand it is good to keep a long term perspective and dont necessarily follow trendy fashionable sectors.

Twickenham_Green_FA

wombat42 wrote: »

But on the other hand it is good to keep a long term perspective and dont necessarily follow trendy fashionable sectors.

Absolutely! If the client has a long term horizon, then the investment plan will always be long term, the crucial thing to do is discuss with the client what is long term is so you're on the same page. However, short term changes can effect long term planning, hence the need to review.

dunstonh

Invest and forget is bad but also tinkering too frequently can be just as bad especially when fashion investing or trying to chase markets. Somewhere in between is better. Tinkering can be rebalancing to risk profile annually (and making sure investments held are still suitable).