Understanding your attitude to risk and learning from mistakes

Diplodicus

JohnWinder said:

The “outbid model” does not impress.

the problem still remains for the 'one-stock' investor, or the two-stock or even 50-stock man if it's possible to own even more. 

It's not a problem for me because I don't consider it to be a thing bedded in reality.

We agree there is no material advantage to diversification. If we are talking about the relative happiness of either player in a zero-sum game, you may imagine that the cautious, costive player has the lion's share but from the evidence of this forum, the more they try to edge towards safety the harder it seems for them to let go of their angst, because they can never reach there by halving the distance. There is always further diversification to pursue. 

There can be a material advantage to correlation. This has been a more rewarding way to occupy my mind but I appreciate that people are different. 

JohnWinder

We agree there is no material advantage to diversification.

Not sure I do. Lest anyone come away thinking that's my thinking, I'd probably say diversification reduces the dispersion of possible returns, and thus reduces risk by that common measure; the size of that would be pretty big in extreme cases of non-diversification. As separate groups, all diversified investors and all undiversified investors would get market returns I imagine. So risk adjusted returns would be a material advantage, whatever material means.

http://www.efficientfrontier.com/ef/900/15st.htm

Diplodicus

Diversification has no +/- effect on one's fortune. If any number of investors diversify their holdings with each other, the net effect is zero. Or, to put it another way, "The fund investors can only ever get the market returns. But the investors, as a whole group, who decide to only hold selected shares, can only get market returns also."

Prism

Diplodicus said:

Diversification has no +/- effect on one's fortune. If any number of investors diversify their holdings with each other, the net effect is zero. Or, to put it another way, "The fund investors can only ever get the market returns. But the investors, as a whole group, who decide to only hold selected shares, can only get market returns also."

Agreed as a group but as an individual the less you diversify the less predictable you would expect your returns to be. So if you can cope with an outcome of large outperformance or large underperformance then no need to diversify. If you want returns to be closer to market average then diversify more.

Diplodicus

Exactly so. 
And it's good that investors can access the relative security of diversification so easily (via the funds JohnW likes). 
Average returns appeal to a sense of fairness, and I respect that. 
Also the legacy of our upbringing in this country, we didn't have agency before - and it's hard to shift that mindset.
For example, we no more thought of taking responsibility for company pensions than state pensions before the Pension Freedom Acts brought the choice in front of us inside the last ten years. 
People about my age (64) are almost uniquely privileged. Ours are the easiest years in which to accumulate wealth. Many have made more in retirement, or semi retirement, than the whole of their working lives.

MaxiRobriguez

Diplodicus said:

Exactly so. 

Average returns appeal to a sense of fairness, and I respect that. 

And a better ability to forward plan. 

If you know a rough range of compound annual growth rates from equities, and a target end goal, then you can start to plan how much capital you need to push in to meet those goals.

With single stocks, and the subsequent range of possibilities increasing, the ability to stick to a pre-defined plan becomes much harder.

For most people, index investing over single stock is sensible.