Attention 20-Somethings: Forget Diversification
I just read another Yahoo Finance article that gave the same repetitive lesson on investing: diversify, diversify, diversify. As far as I’m concerned, you have two options in investing.
The first option is diversification; however, not diversification how most recommend which is buying a bunch of different stocks in a bunch of different industries. Why spend so much effort on simply trying to match overall market returns? If this investment approach appeals to you, achieve diversification by simply buying an S&P Index Fund and that’s it. Continue pouring your money into this position over time and you should perform inline with long term historical average returns.
Your second option is to attempt to outperform the market which is what we here at 20s Money are fighting towards. Diversification is not the path to achieving superior returns.
Diversification Across Industries
If this is your goal, please read the above description of investment option number one. Why would you want to do this? Based on different economic environments, certain industries are bullish and others are not. For example, we have been in an energy and commodity boom for several years. If you have not been overweight in energy, you have missed out big time.
My goal as an investor is to find companies that have fundamentals that support its growth as well as a supporting economic environment. Currently, natural gas is my darling right now which is why I have bet big on Chesapeake Energy (CHK). The result? Chesapeake is driving my portfolio higher, vastly outperforming the S&P.
With that said, it is important not to focus on investments just because it is a part of a hot sector. I, personally, am staying clear of solar energy despite the large attention these stocks have been receiving. Just because the stock is in a hot sector, does not mean it is a sure thing. You need to research the fundamentals of the company. If you can match strong fundamentals with a bullish sector, you may have a case to bet big.
Diversification Over Time
Building positions over time without any regard to share price will help you avoid buying at the wrong time. However, this is not the path to outperforming the market. Leave this strategy for your 401(k). In order to outperform the market, you need to identify buying opportunities. The best investors have generated exceptional returns by being patient and waiting for the right buy. If you purchase equal amounts of a position over time no matter what the share price, you are just averaging out your cost. Instead, find the best buying opportunity and bet big.
The only exception to this is when a stock and/or sector has already had an exceptional run. Read my previous post on how to build positions in stocks that have already hit new highs.
Do You Have What It Takes?
The investment strategy explained in this post is not for everyone. It takes a dedication to researching companies, it takes a willingness to accept a higher level of risk, and it takes a desire to build true wealth. If you aren’t willing to commit, you are better off taking the diversification route that so many “experts” recommend. 20s Money is not the resource for helping you diversify. There are thousands of those resources out there.
We are the resource for the young investor that is hungry to learn the markets, identify long term positions and is willing to be patient to buy at the right time. Let’s partner together to find the best investments and generate superior returns.
If you implement this strategy, you will make mistakes. Your willingness to make mistakes will make you a better investor. The best thing you can do is to learn from each mistake and continue to hone your strategy. Check out my recent post on some of my successes and mistakes in investing in Apple (AAPL). I recommend you performing similar kinds of self-analysis on a consistent basis.
Remember, the majority of your investing is ahead of you. Are you willing to make small mistakes now to reap large returns later? I am.