The Value of a Diversified Portfolio

Published Oct 19, 2020 4 min read
Stan Corey
Brains Compliance Advisor

Our proprietary Brains model was designed to automatically build a diversified portfolio for our Members. But if you decide to “Build Your Own” portfolio, please keep in mind that diversification is an extraordinarily important way to minimize one of the many elements of risk! 

Our Brains boutique funds are neither ETFs nor mutual funds. They are funds consisting of company stocks (10-20 at a time), which fit a certain strategy. These stocks are constantly reviewed, and changes are made to the stock selection by adding additional targeted stocks or removing ones that no longer meet the criteria of the strategy or are not performing as compared to their peers. To learn more about the differences between ETFs, mutual funds, and Brains funds, check out our write-up, “Different Types of Investments”.

Diversification is an important concept, as no individual, company, or computer program has been able to accurately predict the markets or even which investment sector will outperform in the coming year or two. As a result, being focused on one sector, one stock, one category will generally lead you down the wrong path. Having a portfolio that encompasses multiple sectors allows an investor to participate in the markets without incurring the higher risk of being concentrated. 

However, in today’s ever-changing markets, a more intelligent methodology is taking hold, using one’s beliefs as a way to make investment choices. This new level of diversification allows a person to identify what they believe to be the important issues for them and how their own “world view” may impact investment decisions.   

One of the biggest mistakes an investor makes is becoming married to a particular investment and/or failing to rebalance a portfolio’s holdings as the chosen allocation gets distorted as markets change. Just looked at what happened in 2000 and 2008! Investors that got hurt the most are the ones who held on too long hoping for a come-back. There is an old saying in the investment world: “Hope is not a strategy!” The simple solution is to rebalance the portfolio back to the original allocation on a regular basis; quarterly, semi-annual or annual. In addition, as your world view changes, make changes in the types of investments that align with your beliefs. Taking these steps will significantly reduce your overall risk in an ever-changing market. 

What does it take to be diversified? The answer always starts with, it depends!

Just as someone can be concentrated into a few investments or sectors, so can someone be over-diversified by having too broad an allocation. If you have a small amount to invest or are just getting started, consider choosing a category based upon your beliefs, industry knowledge, and world view of the investment markets. When making an investment, write down why you are choosing this particular investment, so you have something to refer back to when deciding to buy more or sell a particular position. You will find that it is almost always easier to make a “buy” decision rather than a “sell” decision! Therefore, when reviewing a particular holding, ask yourself if you would buy more of it. If you review your notes and the same things hold true and the value has increased, you might consider buying more. However, if your review indicates things are much different and you would not buy more, then it may be a good time to sell! 

Lastly, choosing to buy one individual stock versus buying a pool of stocks, bonds, or blend (funds) carries a higher risk. By identifying your core beliefs and worldview, you can then begin to build a portfolio using investments that align with those beliefs.  An investor beginning to accumulate monies for investments will be able to diversify with the Brains funds as each of the funds allows fractional shares of the underlying companies. This enhances the investor’s ability to be diversified even with small amounts on investable dollars. 

To learn more about diversification, check out our “Risk & Diversification” section.