Pokemon Go and Lessons in Diversification

July 18, 2016

 Often when I meet someone new for the first time and they find out that I work in finance, one of the first things they’ll mention is a special investment strategy they’ve recently heard of.  For example, have I heard of the game Pokémon Go because everyone is playing it and wouldn’t it be a good idea to invest in Nintendo’s stock right now?  Or more commonly, they met with a guy who told them about this really great investment product that only goes up, but never goes down and doesn’t that sound like such a great strategy.  Yes – it does. But there’s always a catch.  Nintendo was a great buy – before the game came out, but unless you had a magic orb that predicted the future, you’ve probably already missed out on the run-up (not to mention you probably don’t know when it will reverse).  It would be awesome if there was a special strategy that only went up and never lost money, but in all of my research such an investment doesn’t exist and if it did the person owning it wouldn’t share it because they would want to keep that really great strategy for themselves.

 

One of the primary tenants of smart investing is the concept of diversification which essentially calls for not putting all of your eggs in one basket.  The idea is that by spreading out your exposure to more than one company, you’re less hard hit when one company tanks and you don’t have to stress about correctly picking a winner.  If you invest 100% of your money in one stock and that stock falls 50% you lose half of your money, but if you invest your money in 20 stocks and one stock falls 50% you only lose 2.5% of your money.  By diversifying your investments you set yourself up for a much smoother ride that’s less likely to create the panic and fear that leads to poor decision making.  You probably won't become a millionaire which requires making big bets, but most people can't stomach that type of investing because it is in essence just that - betting.  Furthermore, hindsight is 20-20, but the future is much less clear and it's impossible for us to know what will be the next Pokémon Go.  The smarter approach is to spread our exposure and invest based on good fundamentals and not casino-style guessing.

 

Here at Cedarstone, we believe not only in the benefits of diversification but in the benefits of investing for value.  That’s why our portfolios are exposed to the broad markets and are invested in such a way as to take advantage of healthy vital signs within a given company and region.  If you’d like to learn more about how we invest and why we invest the way we do please don’t hesitate to give us a call or shoot us an email.  We’re always happy to chat. 

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