Decibel (decibel45) wrote,

On the importance of diversification...

One of the newsletters recently made a sell recommendation on a stock that's been a huge loss. I was reading the board for that stock tonight because I'm actually ignoring the sell recommendation and was wondering what others in the community are doing.

Apparently, this recommendation has raised a bit of a stink. :)

Someone had posted about how well stocks had done *after* this newsletter had recommended a sell; basically all of them were up, some fairly substantially. After reading the comments on that thread, I realized how important it is for my sanity to be heavily diversified, and posted a comment of my own.

"And the facts are quite pertinent for those of us who have decided to stay long in AIB, because the fact is that EVERY stock that MDP has previously sold has made money since"

Oh, don't worry about that. AIB is the first position I'm actually holding on to, so it's pretty well guaranteed to tank... ;P

FWIW, I'm holding because my position is only worth $92 right now (down from $400). IIRC it was only $80 when the sell recommendation was made. I think it's worth risking the $80 to see what happens on the 16th.

To me, this thread is a perfect example of why diversification is so enormously important; while I'd rather not lose $80 (or $92, or $400, depending on how you want to look at things), it's still a tiny fraction of my individual stock portfolio, which is only a portion of my overall investments. Presumably I could have made substantially more money not selling AEO or some of the other stocks. But I'm not sweating it. (BTW, I should mention that my broker (FolioFN) allows you to pay a flat rate for an obscene number of trades per month, so my trading fees are very, very small).

I started seriously investing in individual stocks in January 2008. Since then, my overall portfolio (which is comprised 100% of Fool newsletter recommendations) is beating the S&P by about 9 points (not sure if that includes sold positions or not, but I haven't sold all that much). Could I have done better? Maybe. Could I have done a hell of a lot worse? You bet! I'm pretty sure that Fool is out-performing all of my 401k accounts, even after including the newsletter subscription fees.

Granted, MDP is in 2nd-to-last place (beating II, but behind HG, SA and Pro, with Pro being up a whopping 45% without even using any of the options strategies), but it's still beating the S&P by a few points (again, not sure that includes sold positions). So I'm not even that worried about the performance of MDP because it's a) still beating the S&P and b) only a portion of my portfolio.

For those of you who really want to tear into each and every stock idea, do your own due diligence, and form your own investing thesis: that's great, and I hope you can outperform MDP! And I hope that you can provide knowledge that the MDP staff can use as well.

Me? I don't have the time or inclination (at least at this point in my life) to do that. I'm happy to parrot MDP and the other newsletters and settle for my stress-free returns.

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