Diversification

One goal of a portfolio is for it to be “diversified”.  In layman’s terms that means that the stocks are from different industries, in different countries, or otherwise significantly different from one another.  The thinking is that trends that impact one stock, for better or worse, won’t hit all the stocks in your portfolio, so losses in a subset of your shares won’t have a significant impact on all of your other stocks.

 

diversification

Unfortunately, however, stocks often exhibit high “correlation” with one another, meaning that even though the stocks are from different countries and in different industries, they all move the same direction.  This is great when the trends are in your favor (a rising tide lifts all boats) but is hard to swallow when every single stock in your portfolio declines at the same time.  Today was a bad day for stocks but it was amazing that all 18 stocks in Portfolio one had declines and not a single one “bucked the trend”.  It is true that they all move to different degrees, with some just a “bit” in the red and some losing 2-3% on a single day.  In fact every stock except for one single Japanese stock across all 6 portfolios dropped today, which is almost perfect correlation (heading the wrong way, though).

According to news reports, Apple had a bad report, and there was some other economic news, and everything fell and kept falling.  We have bad days like this, and we also have good days when everything rises, too.

Ideally, however, if you have diversified stocks you hope to move up in a good way, with some rising a lot, some a little, and some falling.  But some days are just bad.

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