Ask HN: Should one diversify their stock portfolio
I am relatively new to investing and have been struggling with how to diversify my stock portfolio. Coming from tech industry I naturally have a tech heavy portfolio. If I don't understand other sectors that well, is there a good way to deepen my understanding?
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[ 3.2 ms ] story [ 62.9 ms ] threadEasiest way to get started in other sectors is to google for stock analysis articles. They are written regularly for the major sectors and they will talk about the biggest/most interesting players, where they stand in the industry terms in recent developments, competitive advantages and risks.
With that said, dividing a portfolio across sectors isn't necessarily diversifying. Last year covid basically dragged the entire market down with it (and it's not exactly an anomaly for the entire market to swing in tandem). So if you're looking for resilience against that kind of risk you want to look into other investment vehicles (bonds, retirement funds, real estate, etc)
Or, if you're in the market for high risk asset types, but want things that do not track the stock market, you can consider looking into forex or cryptocurrencies (though beware, these are not for the faint of heart).
Besides, the OP is presumably interested in actively learning about the fundamentals of diversification, not merely asking for low-maintenance safe-ish portfolio options (in which case, buying an ETF would suffice). I'm just laying out different options across the entire spectrum. Personally, no one told me about virtually any of these options when I was starting out (presumably because they were similarly making assumptions about my risk tolerance level), but I wish they had. For example, reading about industry sectors is fine and dandy, but there's a subclass of stocks called dividend stocks that aren't a sector per se, but can be an investment strategy of its own. Index funds come up a lot in this type of discussions, but REITs do not, despite being pretty decent options as well. For crypto specifically, what almost no one mentions is that bitcoin is actually one of the more conservative crypto options compared to upstart altcoins. Etc. There's a lot of reading one can do across the board.
I'm very specific that crypto is not for everyone, but neither are things like shorting stocks, even though one might be more inclined to call shorting "real investing", whatever that means.
You can also get a financial advisor, to help select investments, at the cost of ~1.5%/year.
I have some money in each of these options, plus my own picks that I manage.
For example, you want to know more about oil? Read some of the annual reports of the biggest oil companies:
1. SNP - https://f.hubspotusercontent20.net/hubfs/527622/0-Assets/Inv...
2. PTR - http://www.petrochina.com.cn/ptr/ndbg/202104/eafc059543d2429...
3. RDSA - https://reports.shell.com/annual-report/2020/
4. BP - https://www.bp.com/content/dam/bp/business-sites/en/global/c...
5. XOM - https://corporate.exxonmobil.com/-/media/Global/Files/invest...
One big downside of trying to manage your portfolio yourself is that you have many more opportunities to make unforced errors (particularly behavioural errors), e.g. trading based on emotion, trading based on poor decision making, etc. If you outsource investment decisions to an organisation with a disciplined process and low fees then you prevent yourself from making many of these errors.
https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street
https://www.bogleheads.org/RecommendedReading.php
http://efficientfrontier.com/
On another hand, if you do want to learn more about how to evaluate individual companies:
http://aswathdamodaran.blogspot.com/
https://www.berkshirehathaway.com/letters/letters.html
https://news.morningstar.com/classroom2/course.asp?docId=142...
http://www.efficientfrontier.com/ef/401/fisher.htm
https://twitter.com/WallStCynic
All that said, research has shown that individual stock selection has a relatively minor contribution to overall investment portfolio return compared to other factors such as asset allocation and (especially) the amount you invest in the first place.
I cannot say the same about say, agriculture, food or musical instruments.
So yeah, we have some kind of edge here.
The knowledge you described is unlikely to give you an edge if you have never even looked at the companies' financials or don't know what a discounted cash flow is.
As for understanding, follow the financial news and the news related to the top holdings of industry/sector specific ETFs.
Of course a key part is, when do you think you will need the money? <5 years bonds or similar, >10 years S&P 500, between 5 & 10 .... well its not so easy ...
2. Realize that stock picking is a fool's errand
3. Buy ETFs
I'm 100% invested in XEQT.
As to whether you should diversify, there's really no right answer and it depends largely on your risk profile. Less diversification will typically provide better returns at the risk of greater losses. If you're really confident you know what you're doing arguably less diversification is better. More diversification generally means lower returns, but you'll also be less likely to get wiped out in the event of something like a dot-com bubble. With tech valuations being as high as they are today, it probably wouldn't be a bad idea to have some diversification outside of tech.
If you decide you still want to hold individual stocks and also want more diversification you could split your portfolio 50/50, with 50% in index funds and the other 50% in some individual companies you really like. Alternatively, you could pick some solid blue chip stocks to add to your portfolio. Stocks like BRK.B and KO are IMO great stocks to hold if you want some safe and steady returns.
Whatever you do you should be prepared for a worst case scenario. Over the last year or so I've warned people repeatedly that stocks like TSLA could lose up to 90% of their valuation and potentially never reach new highs if market conditions change. If you're portfolio is full of stocks with a risk profile similar to TSLA it's really just a matter of time before you get wiped out. Having 10% exposure to a stock like TSLA isn't necessarily a bad idea, but a portfolio full of stocks like TSLA is a guaranteed way to look like a genius until the market changes and you lose everything.
Another thing to remember is that every company goes to 0 eventually. Today I see a lot of people speak about tech companies that have only been around for a decade as being "long-term holds". Historically this isn't true. If you don't believe me just look at the largest companies in the world from just a few decades ago. If you're holding individual stocks you need to be occasionally repositioning your portfolio to reflect changes in the economy. This means you'll be paying more tax than if you just held an index fund over several decades so you also need to factor this in.
My guess is that the fact you've asked about diversification suggests that you probably do need to diversify a little.
If you invest in broad index funds in the long run (10, 20, 30 years) you are guaranteed to beat almost all actively managed funds. Fees are going to eat away at your gains and again most active investors can't beat the market in the long term. I use FSKAX with Fidelity but VTI is a similar ETF.