Thanks for the clarification. Diversification has and is widely accepted. We've embedded cliche's and metaphor's in our language and teachings to reinforce this belief. (e.g. don't put all you're eggs in one basket.) Our ancestors used diversification as a means of survival when the lack of food shelter or weapons was certain death. It's instinctive, we're hardwired to believe this. My experience is this: Diversification is a good thing; in moderation. overdiversity isn't necessarily a bad thing(although it can be in certain market conditions) but it almost always results in mundane returns. When markets correct, it's generally broad based, your holdings may be affected. When markets crash/melt down, very few are spared it's effects. Certain instruments,however, don't know what the market is doing, they merely follow their own course. So I've just contradicted myself and have actually told you nothing. I suspect you have the right idea, own a small basket of stocks that are in your field of expertise and watch them carefully with stops. But how do you know your correct? Experience and hard work, followed by more hard work that yields an even great depth of wisdom and experience. Oh...and one truly never masters it all, you never stop learning what the market is telling you. Choose your stops wisely.
Thanks for the discussion, everyone. To the poster who asked: "What do you do if one sector is out of flavor for a few years?" In that case, you would hope that you have made a killing on the sector you consider yourself to be an expert in and can work with mediocre returns when that sector is out of favor. Obviously that's not practical advice, but you could do it. Also notice that I said it would be a great idea to focus on a small group of sectors (3 or so) instead of focusing on 25 different sectors. That way, if one sector is out of flavor, you can go with the others. Obviously that's assuming the 3 sectors you've picked are linked to one another (for example, advertising and media are very intertwined with each other), so your knowledge doesn't go down the tubes when these sectors take a hit. On the other hand, if the markets are crashing, it won't really matter what sectors you are involved in. A good majority of them will be performing terribly to begin with.
If you are only diversifying in stocks yes, not if you hold a broad portfolio including (corporate) bonds, commodities, real estate, private equity, hedge funds etc.
Diversification permits primarily to smooth your equity curve. Speaking of automated systems, I've never found a harder thing than getting out of the undercapitalized zone, because you have to choose one system to rely on, live the DDs... with nothing else to balance your P§L. Automated trading is great for this purpose, being able to handle way more diversification than discretionnary traders. Sometimes, you find some great rewarding niche and you're tempted to solely trade it. But everything has an end and you may have to develop some secondary alternative trading in case it really ends working.
diverfication does not make any sense to me. the market goes in the gang mode, if the general market is surging, then almost everything is surging, just the maginitute difference, if the general market is heading south, then virtually all everything is on sale. if you bought an index, it is the most diversifed vehicle, but you end up losing too. for example, you bought QQQQ in 2000/1999 @100+, what happens, ....just like another enron! it is an excuse for people to get lazy. in what every field, you will find if you want to success/excel, you must focus! as for enron, recently american home maorgate, if you know how to play the market, then you can short them, and you make tons of money on that! actually that is the perfect short sale! for trading/investment, you must take two things into consideration: what market & what timeframe! fisrt you select the market, then you time the market to enter and exit! that is why mutaul funds can not work if you do not pick the right time!
Peter Lynch called it "deworsification" How can you make any real money if one instument is up 10% and the other is down 10%? Go with th winners!
easy answer. To the buy and hold investor, diversification is essential. To the swing trader, it is very style dependent, but diversification can come in handy. To the day trader, pointless in my experience.
that is how those 401k management compaies cheat ordinary people, they can suck out hefty fees from ordinary naive people legally. when your 401k down, they can blame the market or use the diversification excuse to assure you"we are ok, we are diversified", actually they are sucking your blood, they are "wolf in sheep skin". LAW should fine those companies for misleading information
today is another good example, just made tons of money from shorting those high flying. DIVERSIFICATION will save you? naive people follow those financial advisers