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  • Why Diversification Still Matters  0 comments
    May 2, 2014 4:44 PM

    I read a blog post on here today that caught my attention (and my spirit). Kendall Anderson from Anderson Griggs Investment wrote "Views Of the Insane On Diversification" based on a quote he read by Dr. Craig L. Israelsen. The quote was, "Building and staying with a broadly diversified portfolio is the only sane approach for long-term investors." I highly recommend the blog post. It's a great thesis on diversification for experienced investors.

    But I also feel to be the devil's advocate, or maybe just a peacemaker. I don't know the context of the quote or who his audience was, but I do know Dr. Israelsen, and I know that he is a university professor. In fact, I took a class from him a few years ago when I was first starting my path into finance. I also attended a workshop he created for young families and college students. So just from what I know about him, I tend to think that his statement may be geared toward those types of people.

    And with that in mind, I agree with him wholeheartedly.

    There are virtues on both sides, however. For experienced investors, even long-term investors, who understand things like company valuation and all the other technical analysis that goes into determining the intrinsic value of a stock, diversification across all asset classes seems a little counterintuitive. Anderson gives Warren Buffett as the perfect example: "Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing."

    But what about those who don't know what they're doing? This would describe, arguably, the majority of the population. Having worked in financial planning, I can attest that the majority of the people I met didn't even know how to create a monthly budget, let alone get into the stock market. It made me cringe to hear people who couldn't even tell me the definition of stocks and bonds, talk about how they're planning on investing in foreign stocks and currencies because they've heard great things.

    For these people, telling them to "put meaningful amounts of money into a few things" would be like telling them to go jump off a cliff and hope there's water at the bottom.

    So in the end, I agree with both sides. For many of those who do this for a living, the idea of Israelsen's insanity just seems bizarre. But for the rest of the world, barring any freak stocks like Apple, it's the only way they can stay somewhat safe.

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