Portfolio Diversification
There can be no hard and fast rules about diversifying. However, a portfolio should contain a certain amount of cash and interest-bearing securities. These should be weighted towards
- higher yielding secure preference shares that have no downside price risk on conversion and
- property trusts or REITS that have low profit and price volatility.
Towards the end of a bull market, when selling presents more opportunities than buying, the cash and interest-bearing securities will be quite high. In the tail-end of a bear market, when opportunities are more plentiful, the cash and interest-bearing securities might be close to zero.
The amount of cash and interest-bearing securities you carry will depend on several factors, not the least important of which is your comfort level with the price volatility of equities.
Think of the Availability of Opportunities
Conventional wisdom tells us a portfolio should be spread over a diversified range of industries on the premise that a downturn in one sector of the economy will only affect a portion of your portfolio. A contrarian would argue that you should only buy into an industry that is suffering a downturn because prices will be cheap.
However, think not in terms of diversification or acting contrary to the market, but of the availability of opportunities.
Remember Mae West’s words: “Too much of a good thing can be wonderful”. Mae, however, was a woman of experience with the ability to know a good thing. Lacking that same experience, or the necessary time to acquire it, it’s easier to recognize and avoid what is not a good thing.
This approach will not guarantee that every selection will be wonderful. It may even eliminate a few stocks that may have turned out to be wonderful, but in eliminating most of what is likely to be a lot less than wonderful, it should deliver above-average results.
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