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Diversification

Discussion in 'Investing Strategies' started by crc_error, 29th Jul, 2008.

  1. crc_error

    crc_error The Rule of 72

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    We are told that diversification is the key to successful investing.

    Allocate some money into the share market, listed property, fixed interest, global shares, bonds, fixed interest etc. We are even told to diversify amongst different fund managers. Then each fund manager diversifies further and spreads their own money between something like 100 companies.

    I'm not sure of the benefit of doing this. Basically seems to make a portfolio so complex and watered down that you will only get a very basic return.

    Looking at returns from international equity funds, no one seems to have made any money over the last 5 years, but they continue to collect fee's.

    I can see the benefit of say having a direct holding in a investment property, and say Australian shares, as these two are completely different investments.. but to diversify further I can't see the point.

    If your using a financial planner, it will cost you thousands for them to 'draw up a plan' and select several funds, then they present you with a nice book with colorful charts, morning star ratings and expected returns. Will such a plan outperform say a generic multi-fund managed fund?

    will these returns outperform say if you selected a Australian share fund and contributed on a regular basis into it and kept your investing simple?

    I look forward to your view and feedback, because from where I'm standing, I think selecting 1 or 2 quality managed funds is better and cheaper than having a complex plan drawn up with a selection of many funds.

    It could even be better to avoid managed funds all together and select 6-7 shares and buy them up regularly and avoid the 1-2% MER fees which are loaded onto funds.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    The only flaw in your suggestion is the assumption that Australian shares (for example) will always outperform international shares ... indeed over the long term, this has not been the case.

    We have had a great bull run over the last few years based on our resources strength - but that will one day end, and we will once more be well below international averages when it comes to sharemarket returns.

    The problem with international shares is that it takes a lot more effort to select and manage them - corporate governance is not the same elsewhere in the world as it is in Australia and you need to understand the complexities of each of the local markets you invest in (or outsource that management to one of the specialist local fund managers in each country or region and pay extra for their expertise).

    The other problem is currency - as seen in recent years with our strengthening dollar, many great performing funds and shares have seen actual losses in AUD terms. Naturally this can change too if the AUD drops against other currencies. All up, international investing is difficult - but if done right, can be very much worthwhile (although I'm not suggesting that now is necessarily the right time to be making those investments!).

    I actually agree with your basic sentiment, crc ... I see merit in simplicity - and over-diversification won't necessarily protect you from the bad times any more than it will stop you from achieving above-average returns.

    That being said, the risk of putting the majority of your funds with the one fund manager is that they get it all wrong and see you lose out. Key personnel may leave and the resulting team is not able to continue the same level of performance as previously seen.

    You can overcome most of these fund-manager risks by going even simpler still and just buy the index via an index fund or ETF ... but that is by definition going to only give you average returns.
     
  3. crc_error

    crc_error The Rule of 72

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    I agree with that Sim. So now I put this to you, if you suggest getting a index fund, isn't the long term return of the ASX200 something like 12% PA? If this is the case, then I think we are better off just forgetting investing all together, and focus on paying off our own home. That way we save a garranteed 9% PA plus the 30% tax so your net return could be 11.7% garranteed. Why take all that risk of investing into stock markets for a extra possible percent return, and then risk a 20% drop in the market like we have seen lately, and from that it would be vertually impossible to recover that loss to catch up to having had simply paid off your house.
     
  4. BlueFire

    BlueFire New Member

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    Are you sure about this? I seem to remember that the ASX has been one of the top three performing markets over 100+ years. Along with Swedish and South African stock markets.
     
  5. Tropo

    Tropo Well-Known Member

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    “Diversification is a hedge for a ignorant” = W. O’Neil. ;)
     
  6. Tropo

    Tropo Well-Known Member

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    Zimbabwe: Best Performing Stock Market in 2007?

    April 10, 2007 8:21 AM by Mises.org Updates | Other posts by Mises.org Updates | Comments (21)

    The Zimbabwe Stock Exchange (the ZSE) is the best performing stock exchange in the world, the key Zimbabwe Industrials Index up some 595% since the beginning of the year and 12,000% over twelve months.
    And yet, the country is crumbling, writes John Paul Koning.
    Zimbabwe is in the middle of an economic disintegration, with GDP declining for the seventh consecutive year, half what it was in 2000.
    Ever since President Mugabe's disastrous land-reform campaign (an entire article in itself), the country's farming, tourism, and gold sectors have collapsed.
    Unemployment is said to be near 80%. What gives? :eek:

    Zimbabwe: Best Performing Stock Market in 2007? - John Paul Koning - Mises Institute