When does diversification become a bad thing? $SPY $QQQ $IWM

The Animal Spirits podcast is fast becoming one of my favorites for keeping up to date on what’s happening in the financial world. I don’t think I am alone in this. I still watch CNBC mostly to catch Fast Money Halftime but even then, I mostly watch that show to see what Josh Brown’s take on the markets is.  

The common thread between these two sources is that Josh Brown, Ben Carlson and Michael Batnick are all relatively young guys and all three are associated with Ritholz Wealth Management.  

On the most recent podcast of April 11, Episode 24 they reference a quote from Lazlo Birinyi in the New York Times from October 24, 2009. “My issue with diversification beyond that (stocks and bonds) is that an incremental or arithmetic increase in the number of decisions you make leads to a geometric increase in the degree of difficulty (to outperform)”. 

This arose from a discussion on the story that Drew Brees lost several million dollars investing in diamonds thinking, or being advised, that diamonds would outperform stocks and bonds. 

How does this relate to us? Maybe if you are going to speculate on something outside of the traditional market such as art, or Bitcoin, or watches or diamonds, you should only invest what you are prepared to lose. Just assume the value is going to zero. I would only increase the size of my position if I was felt strongly that I knew the market in that asset.  

It’s not only about making money, it’s also about getting a good night’s sleep! 

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