How Diversification Works
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- Опубликовано: 1 июн 2024
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Diversification is one of those things you've probably heard about as something you need to do, but how does it actually work, and why is it considered so important? We explain this and more!
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DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution. Richard Coffin is not registered to provide investment advice and as such does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers.
I like how the thumbnail gives you the answer
Eggselent explanation!
stop😂
You mean eggplanation
I do about 80-90% in index funds for diversification purposes, then about 10-20% are in a few companies I do research on that I have a strong belief will outperform the market. So far has been working quite well for me.
Curious question, do you diversify your index funds or do you invest in an individual one
@@avon8375 not op, but I only focus on 1 mutual fund (not index) that has the best historical return, and before you tell me that historical return doesn't mean a lot, that fund is a mixed fund, where the manager can switch freely between bond and stock depending on the current state of stock market
@@avon8375no one ever answers this
I'll be the voice of the internet and criticize your statement between 3:28 and 3:44, because I think it is a common fallacy among people in the financial market in general. Restating here the important bits:
"banks benefit from rising interest rates, (...), while real estate companies benefit from falling interest rates (...). Holding investments on both, therefore, reduces the risk of your portfolio taking a hit from interest rate changes - one way or the other"
Let's assume what you said is roughly true. If banks benefit from rising interest and real estate companies benefit from falling interest rates, then their stock movements are indeed correlated with the interest rate movements. Indeed, the correlation coefficient would be close to -1, instead of zero. Therefore, holding both stocks actually is a bad idea, because they cancel each other's returns, while still being subject to market risk. A position like that would have actually a negative alpha.
That's a good point, and one I actually thought about after putting the video together. You're right that -1 correlation is not what offers a diversification benefit. A better example would be to show a company that's NOT impacted by interest rate changes. Thanks for highlighting.
I would be happy with investments that perfectly cancel eachother out. Close to no risk and you could collect dividends of both companies. Besides it would be safe to use leverage and thus increase those almost certain profits even more in theory.
But it would allow you too seesaw it: Sell the one that benefits on high and buy the falling one and vice versa.
Predicting the interest rates year or few forwarrd is close to impossible anyway, so that way you get the best of both.
Could you talk about Japan Massive Debt and Italian Situation, like you did in Greece Video?
Diversification though a very common topic in investment, you have made the video very balanced & comprehensive with different approaches and at the same time succinct. The cherry on top are your great graphics and editing.
Well done Richard!
love this channel! Love the fresh style you teach
I was looking for this tool for a while, thanks! It is very useful.
Thanks Richard! I'm doing CAIA now and you've explained everything much easier :D.
You make such awesome and educational videos ! Great job again
Thank you so much, I was looking forward for a video like this. It's a blessing that your channel exists.❤️
One of your best videos so far, great job!!
I know you covered gold but can you do a video on commodity trading generally and how to get into this? Also, a video series of the various bonds investors can use would be great!
Commodity trading and futures are high risk and extremely difficult. You will have to find a brokerage that has a Commodities agreement with the Chicago board of Trade/Chicago Mercantile exchange (Or any equivalent in your region). You will have to ask your Brokerage for some forms and meet the requirements, normally with a hefty capital minimum. It's very easy to lose money as many Futures contracts don't have an option to not exercise it like an Options contract, and could potentially lose you thousands of dollars. Finding university level textbooks, or people in the industry to give some advice, specifically for research tips and exit strategies would be most pertinent and the best way to reduce your risk.
@@PAPADRACOLINi’m not at all interested in trading commodities but thank you for taking the time to explain this for people. good on you!
This video was made 2 years ago. There hasn’t been trading fees at least in the US for way more than two years. Removal of trading fees and fractional stock purchases really revolutionized the ability for average people to invest on their own. God, I remember $7 trading fees from Fidelity. It really sucked to be down as soon as you make a purchase.
Great video. Maybe tackle dividend vs growth vs spec/growth? Portfolio pros/cons next time?
Great speech and graphics!
Great content. Thank you
About the effect of the number of stocks on volatility (around 5:47), I've always though that it only applies for randomly selected stocks. Is that correct? For active management, stock selection is not random, so maybe the graph does not reach a plateau in the same way.
Cool video! Do you think you could make one about the Greeks (Alpha, Beta, Sigma, etc) and maybe shed some light on the Dynamic Beta vs Alpha?
This video says to limit the number of stocks for diversification. I'm curious as to the number of mutual funds and do mutual funds behave similarly after 20 to 30?
Congrats for 200 k
Thank you!
How safe is a capital protected mutual fund ?! Is it safer than or equal to bonds ??
Hey man! I needed some advice if you don't mind. My bank offers me 1.25% interest on 3x leverage investing. Do you think its worth just leveraging a few ETFs mostly the S&P 500 for long term gains? I would keep around 30-40% cash to be able to fill any margin calls I get. Thanks!
Top content! Subscribed!
Can you do one about what a market maker is??? There are no good videos out there for that.
Great video! Could you do one on the 'Efficient Frontier' sometime?
Hello, i know that around a year ago you made a video about options but you did not mention things like for example : a stock split does not affect the underlying option value etc. etc. and what other things might happen but does not make your option more profitable or the reverse ( another example would be when a stock exchange or broker like in china closes the market but you have an option expiring in that day ) . Can you make a video and delve deeper especially now that option became more popular. I hope you understand what I am asking.
Ok so how many diffrent stock should i own for portfolio
I just did the asset correlation from the website mentioned in this video. Can you tell me what would be considered a good or bad correlation % number (11 stocks, 10 ETFs, currently)? I understand what a standard deviation is. but I'm seeking a percentage to understand good v bad.
The lower the number, the better. Perfect correlation (both go up at the same time) is 1, perfect negative correlation (one always go up when the other goes down) is -1. If you were to find two assets that you believe are both good then even slightly negative correlation is quite good. You're not really going to find much with negative correlation that's not a sure sucker's bet (ie if you short a stock and buy the stock somehow, you in theory have negative correlation, but now the fees are going to eat you alive without giving you anything in return).
Diversification is the key to a well rounded portfolio
Hi. Thanks for a very simple but thorough explanation. Your videos are really fun to watch. Would you do a video on moving averages? I keep hearing the term but don't seem to grasp the concept. Maybe discuss the pros and cons of investing based on moving averages? Thanks.
Hey Richard, thanks for this helpful video. Any chance you could do a video on ways to invest the right amount like Kelly Criterion and others?
Not sure if you have already covered this topic, but could you explain the main differences between ETFs and Mutual Funds. Thanks for the great content!
I do have two older videos (episodes 5 and 6) that discuss them; they are lower quality videos so you’ll have to bare through that but they do cover the topics indepth!
Over diversify or not to overdiversify, that is the question.
do whatever you want mate. I've invested in comapanies I like and believe in, not just to diversify my portfoli.
Still the best Canadian finance RUclipsr!
jim8072 him and Ben Felix
Could you make a video about hedge funds?
Hey Friend ! Great Video ❤️✌️! Can you please make a video on books that are helpful for beginners to learn investing ?
the quran
@@suggestiveguy Torah.
If you're a buy and hold passive investor, more diversification is always better. These investors use market cap weights so they don't trade much even within the fund. Market cap weighting is kind of a natural rebalancer. Having 0.0000005% of your money in some micro-cap doesn't effect the price of the fund much but it still non-zero. All that said, performance of VTSMX is nearly identical to VFINX.
keep it up 👍
yes
Do a video on the relationship between futures and stock prices.
6:22 "high transaction fees..." I don't think any of the major brokers do this anymore. The fees are usually waived at most major places as long as you do them online.
Maybe this is true in your country, but in mine (The Netherlands), all brokers ask for a fee. Usually about $10 per transaction, irrespective if you do it online or via an employee of the broker.
@@sanderdejong66 USA
In Finland my bank is currently cheapest as far as I know, and they charge from 0,15 % to 1 % transaction fees.
Basically with the amount of sums I can afford, it's that 1% per trade.
@@jhutt8002 I can't wait to open a brokerage firm in that country and charge 0% transaction fees.
@@muffemod With the bureacracy, taxation and expenses involved to that here, I'd like to hear how that goes...
Few brokerage firms I know of charge actually more than banks. At least from regular client, I'm sure big investors have their own deals.
1:27 those are some risky bagels to invest in
"The way to become rich is to put all your eggs in one basket and then watch that basket.
" ~Andrew Carnegie
"Keep all your eggs in one basket, but watch that basket closely." ~Warren Buffett
Love youuuuuu
What transaction fees?
PLEASE FOR THE LOVE OF GOD MAKE WEEKLY VIDEOS
I am probably way to diversified by most standards. I have large positions and small positions. I feel much safer having exposure to the broad market. In fact, I want to diversify more than I am. I just know leaving my wealth in cash is not a good idea.
The only reason to split your investing portfolio, is when you dont find one or two stocks that you value the most. When you split your investing year you have lower chances of losing all, and make more. In the end the out come of the risk reward stay the same if the risk and reward are the same for all the companies. When you split your portfolio you are just saying that you dont know what will be a good investment. Even look at the S&P500 if you will choose only one stock, you can easily find one that will beat it all. Just research and find a company or a sector that you like a believe in, figer out the data and busines plan, and stick with it. If you fail it mean's that you have no clue of to value a stock and just find some ine who will do it for you
I have 26 holdings. None of my holdings are above 5% of my portfolio. I'm able to keep track of that many companies, so it isn't a big deal. I'm hoping I don't have to change anything for at least 10 years.
Wealth is build on concentration....if you hold more than 7-10 stocks it takes a massive toll on your probability to gain higher returns...
@@shriram9532 I'm not trying to get rich quick. I'm just trying to get to a better place with a degree of risk that is comfortable to me.
@@gamingguru2k6 i'm not trying it either rather than trying to invest 26 comapanies you can find six companies with best quality , cheap price , strong financials........warren buffett had most of his money in three or five companies when he had less money....now he can't do that...26 different stocks is definitely over diversfication
I love volatile stocks, because I constantly get the itch of trading.
Having a stock sitting on a level for months gets on my nerves, I rather have it move at least somewhat so I can tinker and adjust my positions accordingly.
How much money you start with for investing?
It doesn't take much! With a few hundred dollars you can buy an ETF that's already diversified, although you would need to determine if that's the right decision in your circumstance
@@ThePlainBagel how much compound yield you got is all this years?and how much yield make you satisfactory in stock selection?
I know this is something personal,and you are free to not answer the question
I'm 100% diversified in GME
Hey bagel. I went trough your videos and didn't find any videos talking about passive income. Basically gaining money from the companies, because you own a part of those companies. How come?
Because they are called dividends
can u use time stamps in your video?
for an active investor, 3 to 20 is about right
You only need a few holdings if you research them before buying as much as next car. Diversification can cause you to put money all over, and watch one take over the portfolio. Of course, if the object is to diversify instead of make money, your choice.
Or put it all in Apple, Amazon, Facebook and Microsoft.
The academic would like to disagree
Theoretically, you would want to find positions with a -1 correlation (one goes up when the other goes down) not 0. 0 means no correlation at all, which is completely different than negative correlation (yes, negative here is good). Of course this doesnt happen in the real world, although the closest you may see is a correlation of .3 (Japan).
Actually for diversification benefit you would want 0 correlation. The point isn't to have investments moving in opposite direction (i.e. when some go up, others go down) but to have them unrelated so that if one goes down, others aren't dragged with it. If you had 2 positions with a perfect -1 correlation, you would never earn a return (you would net 0%).
My interest rate risk example wasn't a great one because it actually would infer a -1 correlation, which is not correct, but a good example would be to invest in companies exposed to interest rates as well as those not impacted by interest rates. If there's a change in interest rates, some of your positions will be impacted, but others will not be affected.
My entire savings is almost 50% in my company’s stock. As in, the company i work for. ESPP. I just haven’t gotten around to divesting. Pay income taxes for the ESPP discount so…I don’t like it. Plus, it’s barely broken even or might even still be red. I don’t want to pay taxes for essentially earning nothing.
Random Walk Down Wall Street, a great Book on diversification.
I think investing in like Gold and stuff not only stocks is important too
Simply you can do between DJI and Dax
I get it but don’t u think buying a real estate company and bank would be just parking your money? Seems to me like the same situation where you bet on the win of a team and a loss...
As much as I would have loved to have 100% in Tesla, I'm good with having 10% of my portfolio :)
i used to be 100% into calls on micron, im now 50% calls and 50% stocks. thanks
When you have too many eggs, make an omelette.
The 24 people who disliked have no life
Gotta spread out your eggs into different baskets...just in case
3:00
It is important to put money into some great stocks and then look for some bad stocks to balance it out, right? What about just selling your stock when they start dropping. Buy again when they start rising. I got crappy results when I use to diversify and great results when I bought no more than 3 stocks at any time. I can easily monitor 2 stocks at a time and have made over 40% per year for the last 5 years.
That's what I've done with great results thus far.
I mean there's hardly a risk of massive failure even just owning one stock if you know what you're investing in and be ready to jump the boat if your tactic turns out bad.
only for people who can't analyse businesses tho , if you can analyse good companies why put money in bad companies.
*Some people put all their eggs in one investment and personally I think that is very risky. What happens if that one investment fails?* 🤔
I was worried because my cream cheese was going bad 🥯
Maximize your loss with a nice even spread
Cross over with @benfelix?
if you are paying any sort of fee for ANY stock trade / etf purchase in 2020 you are doing it wrong...
You don't diversify you get burnt.
A little heart please!
Williams Douglas Rodrigues Monte here’s one! ❤️
Hehehe he said idioms
46th?
Good thing I'm planning on holding 5 ETFs for 5+ years.
Warren Buffet and Charlie Munger has a different take when it comes to diversificaion. I wonder why?
Because they fundamentally misunderstood the efficient market hypothesis and modern portfolio theories. Diversification is NOT meant to protect your portfolio, it is meant to increase the reliability of your return in the long run.
From my point view and my experience all this years in stock market, you need to invest smartly, if you need good things of life, i made over $240,000 last month and still counting from my diversified portfolio strategy and i believe anyone can do it if you have the right strategy. mutual funds takes a long time but investing smartly is the key to short term
I made $30 when I invested $180 in a year but urs is a lil more I think
*still buys SPY*
😬
buy gold. inflation will do the rest
Gold isn't a good long term bet, and inflation eats at its value also.
First haha
Buy land, they're not making it anymore.
3:43 Terrible advice given 2008..
Diversification doesn't work, just look at the state of france, Germany, uk and especially Sweden.
Please tell us more.
lee macdonald ...so? 😅
Sorry could help myself when i seen diversification.
Anyway for me i tend to hold a maximum of four stocks, you don't need to be in every stock.
All nations that aren’t under trillions of debt? All with good healthcare? All with no mass shootings?
He said diversification, not diversity.