Financial advisors have long preached “diversification” as a way to protect portfolios.
Yet, Robert Prechter offers a cautionary note in his Elliott Wave Theorist:
In some contexts, diversity is a good thing. If you want to bank safely, for example, it might be smart to place your money in the four safest banks you can find. If you believe a major market bottom is at hand, it might be smart to buy a dozen of your favorite stocks rather than just your top favorite.
But advisors who recommend diversification across investment media generally do so because they have no basis for a market opinion. If you would not invest in one market because of some advisor’s lack of knowledge and ability, why would you invest in 15 markets because of the same lack?
Investment approaches themselves generally become popular at the wrong times. When many markets have gone up for a long time, diversification is “in.” That is usually about the time when diversification will kill you. In 1980 and 1982, safety was in, and that is when it did you the least good.
Don’t be one of those investors who stake everything on the diversification doctrine.
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