re: What about diversification?
Way overrated. First, the only thing you achieve by diversification, is to decrease the volatility of your portfolio, to the market's average volatility. If the market shows a lot of volatility, then a diversified portfolio will too. Most people equate volatility with risk, but I define risk differently: the chance of underperforming US Treasuries. By that definition, diversification does not decrease risk.
Second, even the decrease in volatility only happens up to a max of 8 stocks (in different sectors, so they are independant variables, and don't track together). Over 8 stocks, you get diminishing returns, in terms of decreasing volatility. A portfolio of 8 stocks in 8 sectors, will have about the same volatility as a market index fund (assuming they are in the same sectors; obviously volatility will be higher in a portfolio of 8 techs).
Third, every additional stock I buy, involves a big investment of my time. If I don't have the time to follow an industry, then my risk increases, if I buy a stock in a sector I don't understand, or don't follow. After 6 years of investing, there are about 6 industries I think I understand well enough to invest in. And I don't think I'm willing to spend any more time than I do now, studying stocks, so I doubt I'll add many more sectors to my universe of possible investments.
Fourth, once a position is in LT cap gains territory, I will sell it in increments, if it gets to over 20% of my portfolio.
Lastly, I'm actually very diversified now, for me, with stock/LEAPs in 6 companies. Back in early 1997, I had a portfolio of only 2 stocks, AMAT and CSCO. Maybe in another 4 years, I'll be up to 10 companies; I doubt I ever get much above that.
If the LEAPs are well in-the-money, I will probably not convert all of them into stock. I'll sell enough of the LEAPs, to have the cash to convert the rest into stock, so that I end up with a max of 20% of my portfolio in EMC stock. |
