It's the risk mitigation and consistency most folks don't have. Most never will.
i agree that these things are very important. i have read some of dabum's stuff on this subject and it strikes me as sensible, e.g., having looser stops on long-term holdings because tight stops will get hit too easy.
although personally i do not use stops--some of my best stocks dropped 80% or more from my initial buy-in (e.g., VLO, FCX)--i can see how others would use them to reduce risk.
in 1999 and 2000 i had no "risk mitigation", which obviously made it easier to get high returns, but amplified the risk (and the required luck). since then i have been very much in the risk reduction camp.
while daytraders may use stops, i simply have my fixed/equity split. also, even though my PF is heavily weighted to energy these days, i think diversification is a good idea. if your assets are uncorrelated with each other, your PF will have lower volatility. after a great January last year, energy stocks were "challenging". but many other sectors did great. having some noncorrelated assets was a big help. i had a big position in Brazilian bonds and some value stocks that helped ease the pain.
nowadays, my problem is that "everything's a bubble" as Grantham puts it. if that is true, then different asset classes will no longer exhibit their historical covariances (the degrees to which they are uncorrelated with each other), and not be very helpful at PF diversification. |
