David Hirshleifer, a finance professor at the Paul Merage School of Business at the University of California, Irvine, says people have a natural tendency to like things with which they're familiar."We treat things we're used to as friends.""
"..a report released earlier this year by Citi found that a portfolio should have 25 to 30 stocks to minimize stock-specific risk. It found that only one in 10 stocks consistently outperformed the Standard & Poor's 500-stock Index over the past 20 years in any three-year period. Additionally, a third of the stocks in the index underperformed the overall market by at least 15% or more at any given year. Mr. Munshower says it isn't unusual for high net-worth and ultrahigh net-worth clients to have high concentrations of one stock in their portfolios. "It's very hard for people to sell a concentrated position...""If there is one thing finance can teach us it is to diversify our investments. While diversification will not eliminate risk (systematic risk is still going to be a problem in most cases), diversification will reduce risk.
How important is diversification? It is the the second most important piece of investment advice I give my family and friends. The list?
- Invest early and often to let compounding work in your favor.
- Diversify! Across asset classes and across different investments. (remember not all investments are made in financial instruments-education is also an investment, so too is your health).
- Transaction Costs matter: keep them low!
- Make full use of any tax-advantaged plan.
- Automate your savings so you do not need to worry about them. (also what you never had you will not miss).
- Do not panic. Think long term. Ups and downs happen.
- Live below your means.