The Art of Investing or OMG Stop Diversifying and Focus

How is your investing going? If your not driving the latest Porsche then this article maybe for you.

To demonstrate the concept contained within this article try this simple exercise: simply hold your hand up in front of your face and spread your fingers slightly apart. Now focus on a finger tip. Now focus on two finger tips at the same time. Having trouble? Now try 3 then 4 then 5 finger tips. Absolutely impossible to focus on more than one at a time. So how many investments are you in at the moment? How are they doing? All winning? Or all losing? If there is a major market shift (in either direction), then do you even know which investment will you focus on first?

Consider the following example of a $25,000 portfolio which contains 5 different shares:

500 shares of ABC bought at $10 each, worth $5,000. 
500 shares of DEF bought at $10 each, worth $5,000. 
500 shares of GHI bought at $10 each, worth $5,000. 
500 shares of JKL bought at $10 each, worth $5,000. 
500 shares of MNO bought at $10 each, worth $5,000.

3 months later ABC has risen to $11. ABC is now worth $5,500. DEF has also risen but is the star performer at $14 per share, it is now worth $7,000. GHI remains at $10 and is still worth $5,000 JKL has dropped by $2 per share to $8 and is now worth $4,000. MNO hit by lower than expected profit is now $7 per share and is worth $3,500. The share portfolio has it’s winners and it’s losers yet after 3 months the portfolio is now still only worth $25,000 in total.

The losers are counteracting the winners. This portfolio although not losing is costing you time and profit.

Now if we were to optimize the portfolio as suggested in this article, the following may have occurred:

  1. We sold MNO at $9 in effect losing $500 but reinvesting $4,500 in DEF when it was at $11 per share, buying 400 more shares.
  2. GHI hasn’t moved so we also reinvest into DEF also at $11 per share buying 450 more shares.
  3. We later sold MNO at $9 also in effect losing $500 but reinvesting in DEF when it was at $12 per share so we bought 375 additional shares.
  4. ABC is gaining but DEF is clearly the share where all the gains are happening so we sell the 500 shares at $11 worth $5,500 and buy even more DEF at $12 per share gaining an additional 450 shares.

The portfolio now own contains DEF but now has 2175 shares of it valued at $14 per share. Makes sense doesn’t it. It’s the simple action of selling off losers, cutting the loses to a minimum and buying into the share that’s moving up.

Even though $25,000 was originally invested and some shares went down, there is now a gain of $5,450 (+22%) by optimizing the portfolio!

We have also cut down the management of the portfolio by 80%.

A much happier place to be, don’t you agree?

Now ask yourself this question: What is your advisors current track record, right at this point in time. I am fairly certain they will be like most other advisors having some winning and some losing, just like your portfolio! Remember the losers cancel out to some degree the winners. So why not drop the losers? Take positive action. Cut your loses and run. Remember to check just how good your advisor is, count the winners against the losers, its simple to do. Compare your advisors track record against others, it may pay to swap.

If you could focus on one investment at a time. Which one would it be? If you could drop the losing ones and reinvest in the winning ones, how much happier would you be? If you could focus just on one winning investment wouldn’t that be a happier place and certainly more comforting? Having to action only one investment allows you to track it more carefully and allows you to take the appropriate action when required, quicker than if you had to action more. 
Logical isn’t it.

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