What is your definition of diversifying?

Question

Every experienced investor knows you should diversify your investments a little. I already do, but I have a specific question. Let's say someone is new to investing wants to invest their money and doesn't want to spend a bunch of time learning the types of investments. So I tell them, put all their money in SPY. On one hand, SPY is just "one" investment. On the other hand, SPY is really 500 different companies. By just buying SPY, would you say they're diversified?

Answer 1

Diversifying to me means you have money in stocks, bonds and real estate. However each of those main 3 categories has subcatagories.

Stocks have big cap, medium cap, small cap, and foreign stocks.

Bonds have short, medium and long term, as well as corporate and government.

Real estate has commercial and residential.

The goal of course is to have at least a little exposure to everything.

If this weren't for a retirement account, I would buy a total stock market fund, and a foreign stock market index type fund, a total bond fund, my personal home residence, and then a commercial REIT fund.

With this, I've got exposure to just about everything out there.

Actually, if you mix in my retirement and non-retirement investments, this is pretty much what I'm doing now.

Answer 2

You first must trust your judgment. hypothetically A woman down the lane makes lye soap, and Mr Proctor makes candles. Which of the two would be better to invest in for growth. The candle maker until the light bulb was invented. Diversify in the 1) things people need and buy the most often essentials Food, 2) Energy, 3) Transportation, 4) Amusement Parks, 5) Drug Companies, 6) .Communications and systems.7) Vote against those who want to tax your wealth because of your good judgment.

Answer 3

You're not really diversified by buying stock in 500 different companies. To be diversified you need to be invested across asset classes, as well as in stocks in different industries. You need to be invested in stocks, bonds, cash such as CD's and money markets, real estate such as a house, international stocks and bonds, precious metals etc. To be diversified you need to have investments that are not correlated with eachother.

Answer 4

well for some thats all they would need. But my definitition of diversified is a mixture of stocks (no more than 20% of total portfolio on any one) throughout the globe (30% internationally is good enough) in all market caps (small medium and large) and a mixture of growth, value and blend (which is both) and different sectors (technology, oil, financial etc..)

do that and I think you are diversified (gettong a small amount of bonds and a cash holding helps too)

the best way to see diversification in action is www.morningstar.com and click on tools and then xray portfolio.

Answer 5

Diversification is basically reducing the unsystematic risk. So for an average investor buying S&P would i feel constitute diversification and if u want more then buy wilshire 5000.

In general it depends on how risk averse the investor is and accordingly different asset class portfolio should be formed ie. bonds,stock, treasury, international.

Hope that helps.

Answer 6

it depends on the companies that compose SPY. If SPY is all tech stocks, then no. If SPY is some random assortment of all market segments it can be argued you're diversified, but that is not a position readily welcomed in the industry.

Answer 7

spreading out the risk over different types of investments

Answer 8

No. They should also own bonds. Their tolerance for risk determines the mix.

Answer 9

lots of different stocks in your holding