Over Diversification

Hello!

🥧Happy Pi Day eve!! If you can say more than 8 decimal points into Pi, then you have me beat.

If you are ready to prove it, we have a little competition on X Spaces this Thursday. More info below.👇

This is not investment advice and is intended for entertainment purposes only.

Over Diversification

Too much of a good thing?

Much like watching my little brother push his body to the max eating meat at Fogo De Chao, sometimes you can have too much of a good thing, and that next slice of slightly-grey lamb isn’t quite as tasty as the first.

We talked about why diversification is a good thing last week because it spreads your investments across different sectors and industries to limit your volatility and general exposure to risk.

Yes, you can over-diversify to a point where your returns get diluted.

This means that owning over 20 stocks could actually hurt your returns.

☕️TEA😱

Systematic Vs. Unsystematic Risk

Systematic risk is essentially things beyond our control. It includes macroeconomic factors such as inflation, war and other large-scale events that hinder the economy broadly.

You cannot diversify your systematic problems away. The only way to protect against systematic risk is to hedge your positions accordingly.

With that, diversification only goes so far in protecting your portfolio from losing value.

It’s unsystematic risk that can be diversified away. But once you get to a certain amount of open positions, you start to see diminishing returns in your portfolio.

Think of unsystematic risk as way more micro and niche to a certain company. If the CEO of the company you own decides to go rogue on X and post out-of-pocket emojis (🌝), the stock price may take a hit.

The So-Called “Magic” Number

According to the Institute of Business and Finance, “61% of stock risk can be eliminated by owning 200+ stocks (or a single, broad-based U.S. stock index fund); 56% risk reduction with just 20 stocks from several sectors.”

So, there is very little differentiation between holding 20 stocks and 1,000 stocks.

The benefits of diversification and risk reduction are minimal beyond the 20th stock - ie. diminishing returns and reverting to the mean.

So owning too many stocks can start to limit your upside and impact your portfolio negatively.

Keep this in mind as you use ETFs/Mutual Funds to invest in diversified vehicles because if you also hold individual companies, you may mute your potential returns.

But keep in mind, it’s all about your goals and risk preferences so keep that in mind when you are looking into how diversified you are❤️

Weekly Tidbits

• New York Community Bank gets a lifeboat: NYCB received a $1 BIL cash infusion from Steven Mnuchin, an ex-treasury secretary, and his involved firms.

• This Weekend was a Movie: The Oscars drew in the most viewers wince 2020 coming in at 19.5 Million views. The Barbie and Opeheimer hype probably carried the momentum.

• A Fully Remote Work From Home Boom: Maybe this is less than you expected, but the total number of days Americans spend working from home is up 5 times from its 2019 figures. 

Pi Day Contest

Tune into X Spaces to attempt to say as many figures past the decimal point of pi as you can without cheating.

If you can say more than me, you get a prize (surprise giveaway🔥)!!

X Spaces: Thursday, 03.14 @ 4 PM PST

Meme of the Week

Credit @dougboneparth

1  . https://icfs.com/financial-knowledge-center/systematic-and-unsystematic-risk