Wall Street's watchword has always been diversification, but what does it mean and why do they say it?
The standard Wall Street definition is flexible because each broker or financial planner will vary the portfolio based on your age and income. They say that the younger you are the more risk you should take and the older you are the less risk. They design a group of individual stocks, mutual funds and bonds to fit your personal profile and inclination toward risk.
For a young guy under age 35 they will put you into more high flyer type stocks, hardly any mutual funds and no bonds. As you go over 40 they start adding bonds to your mix and nearing retirement you will find a huge portion in bonds. Their goal is to have your money fully invested at all times and hope for a return of about 12% annually.
Why a little here, a little there? Because they have no idea how to make money so they hope that one segment of this hodgepodge will make enough to money to offset losses in the other area. They never look at each group separately for its performance and they NEVER tell you to sell anything at a loss so you can move into an area that is earning better profit. Wall Street brokerage houses really have no idea how to make money. Their job is to make commission. These portfolios that have been designed for all the little investors were made that way so they would not be sued by dissatisfied clients.
If you complain about poor returns they say everyone does it this way. Brokers have been taught this type of thinking for so long they think it is right and any other approach is heresy. If you want to do it differently you have to do it on your own. Why do these financial geniuses want you to be fully invested? If you had cash in your account you might take it out. And mutual fund managers never want you to take your money because they get paid by the amount of money in the fund, not on the investment return. Some investors write nasty letters to fund managers. Folks, save the postage. There is only one thing they understand - when you move your money elsewhere.
Rule One: Don't buy any individual stocks. You are not qualified and probably don't have the time to find issues that are going up. Rule Two: Buy only no-load mutual funds at a discount broker. Which ones? Only those that are going up and outperforming 99% of all other funds for the past 6 and 12 months, no longer. When they quit going up, diversify by moving your money to a better fund. Rule Three: Learn to time the market so you will not be caught in big downdrafts. Even the best funds go down then. Your broker will tell you can't do this because he doesn't know how.. It can be done. There will be times when you are 100% in cash.
These three simple rules are my answer to diversification, but will never be taught by Wall Street.