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Are You Getting Diversification Wrong?

The biggest problem DIY investors make is getting diversification wrong. They either over or under commit to diversifying their portfolios.

Hi, I'm Bradford Ferguson and I get it, everyone tells you that you should diversify, but know no one really explains what that means. That makes it easy to get it wrong, to help understand this concept better, let's talk about your diet.

As a kid your mom or dad probably pestered you to eat fruit and the dreaded vegetable, all in the name of a balanced diet. And we all know that a balanced diet is important to keep you healthy, but when you're talking about your diet, balance really means diverse. For instance, you can't skip foods without consequences. If you skip the fruit, you don't get vitamin C and you could get scurvy. Don't eat dairy and you don't get calcium, you could get osteoporosis and brittle bones.

On the other end of the spectrum, if you eat too much of a food, that has consequences, too. A diet too fatty could fill your arteries with cholesterol and cause weight gain. Eat too many salty foods and you could retain water and develop high blood pressure.

I think you get the point A diverse diet, a balance diet, is important.

Diversity is important in your investments, too. In this case, diversity means owning a variety of investments across asset classes. So, if you own Pepsi and Coke, are you really diversified? Any Coke drinker will tell you that Pepsi is not the same, but they're both food and beverage companies. So, unless you consider a diet consisting only of apples and oranges balanced, you aren't diversified.

Beyond that you need to avoid over and under diversification. Don't become a collector of stocks, this is like binge eating. And don't narrow your portfolio to the point where it only takes a few corrections to end you. It's like eating only potatoes during a potato famine.

Your portfolio is like your diet and you need to find balance.

So can I be brutally honest for a moment? That balance is something that takes practice, discipline, and experience. Odds are you don't have it, and you might be able to learn it, but do you really have the time to learn an entirely new career?

Is it worth the risk to your future for you to try and learn how to be an investment dietician? Instead you can hire one. An investment manager, that is.

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