Ask HN: Should one diversify their stock portfolio

[saching90]

I am relatively new to investing and have been struggling with how to diversify my stock portfolio. Coming from tech industry I naturally have a tech heavy portfolio. If I don't understand other sectors that well, is there a good way to deepen my understanding?

[agent008t]

Just because you come from the tech industry does not mean you know something special about the tech companies, their business prospects, financials and how attractively they are priced.

[agent008t]

Another problem with concentrating in the industry in which one works (and even worse - the company for which one works), is that in the event of a downturn, both your job/career and your investments will be hit at the same time. Just when you need your investments the most, they will be worth less than you expected.

[sloaken]

That is what happened with Enron. Company went under, peoples 401K were in the company stock, company matching was in the company stock. After that I noticed companies would either not let you put your donation to the 401K be in company stock, but sometimes the matching would be.

[muzani]

Dot Com is one of the biggest examples. Tech is everywhere now and it's less likely but I can definitely see this for crypto because everything is anchored on Bitcoin (and Tether).

[croo]

You have way more insight than the average non-tech person. You know who is big and a small fry in the game, know the trends. You read the tech news in the last 10 years. You have preferences and opinions.

I cannot say the same about say, agriculture, food or musical instruments.

So yeah, we have some kind of edge here.

[agent008t]

You are not competing against the average non-tech person, but against professional investors that study the companies inside out, question the management, consult domain experts etc.

The knowledge you described is unlikely to give you an edge if you have never even looked at the companies' financials or don't know what a discounted cash flow is.

[askafriend]

It doesn't take a genius or a DCF model to know that investing in Apple a couple years post-iPhone is a no-brainer. Momentum and trend based investing is just as successful as nerding out over numbers. You can simply be right in broad strokes and be successful - you don't have to get every detail right. It helps to have a long time horizon.

[agent008t]

Sounds like hindsight bias. If it was a no-brainer at the time, everyone would have wanted to buy Apple stock and few would have wanted to sell, pushing the price up to where it no longer is a no-brainer.

[askafriend]

Actually I do have special insights about the tech industry as a result of me being entrenched in it. These are views that have taken years to proliferate into mainstream consensus view. Investing against my insight into the industry is the best thing I've done.

[Graffur]

Although it may give you some beneficial thought processes about products and future state of the tech industry.

[linsomniac]

Consider using a "target retirement fund", they have different ones that are based on the expected retirement year, and the mix gets more conservative as that year approaches. Vanguard has a series of them, for example VFIFX for 2050 or VTTSX to 2060. These can be purchased through low cost brokerages other than Vanguard, if you like.

You can also get a financial advisor, to help select investments, at the cost of ~1.5%/year.

I have some money in each of these options, plus my own picks that I manage.

[noud]

To answer your second question: Most to all public companies release annual reports (e.g. 10-K) where they explain what they do and what they are planning to do. To deepen your understanding of other sectors I would recommend reading/skimming a couple of these annual reports. I think this will give you a good start understanding what a sector is doing and also specifically how a company in the sector is doing.

For example, you want to know more about oil? Read some of the annual reports of the biggest oil companies:

1. SNP - https://f.hubspotusercontent20.net/hubfs/527622/0-Assets/Inv...

2. PTR - http://www.petrochina.com.cn/ptr/ndbg/202104/eafc059543d2429...

3. RDSA - https://reports.shell.com/annual-report/2020/

4. BP - https://www.bp.com/content/dam/bp/business-sites/en/global/c...

5. XOM - https://corporate.exxonmobil.com/-/media/Global/Files/invest...

[roland35]

For your retirement, yes diversify. Knowing and understanding technologies isn't the same thing as knowing and understanding tech stock. Just look at Peloton as an example - they did great during the pandemic, but just had a child die because of their treadmill and now lost 15% in a day. The US Government could break up Facebook tomorrow. Who knows? If you want to try and gamble do so with a little bit and see if you can beat the SP500 over a few years :)

If you invest in broad index funds in the long run (10, 20, 30 years) you are guaranteed to beat almost all actively managed funds. Fees are going to eat away at your gains and again most active investors can't beat the market in the long term. I use FSKAX with Fidelity but VTI is a similar ETF.

[Nicholas_C]

Buy the S&P 500 and save yourself a lot of time trying to pick industries.

[sloaken]

Agreed, that is the simple and low stress method.

Of course a key part is, when do you think you will need the money? <5 years bonds or similar, >10 years S&P 500, between 5 & 10 .... well its not so easy ...

[digianarchist]

1. Read "A Random Walk Down Wall Street"

2. Realize that stock picking is a fool's errand

3. Buy ETFs

I'm 100% invested in XEQT.

[lhorie]

Depends on what you have in mind when you say diversification.

Easiest way to get started in other sectors is to google for stock analysis articles. They are written regularly for the major sectors and they will talk about the biggest/most interesting players, where they stand in the industry terms in recent developments, competitive advantages and risks.

With that said, dividing a portfolio across sectors isn't necessarily diversifying. Last year covid basically dragged the entire market down with it (and it's not exactly an anomaly for the entire market to swing in tandem). So if you're looking for resilience against that kind of risk you want to look into other investment vehicles (bonds, retirement funds, real estate, etc)

Or, if you're in the market for high risk asset types, but want things that do not track the stock market, you can consider looking into forex or cryptocurrencies (though beware, these are not for the faint of heart).

[ixacto]

COVID freaked out the stock market last year. Then it rebounded due to tech companies bring such a large part of the index. Residential real estate did great dispute COVID in some markets.

[vladojsem]

i would not call cryptocurrencies investing. and i would not recommend it to someone who is just starting / as the question suggest.

[lhorie]

I mean, there's a big difference between not being comfortable with a class of investment vehicles and something not being investing. Any asset whose value has the potential to appreciate can be considered an investment. For example, buying/selling businesses, physical gold, art and even rare pokemon cards are all forms of investment, albeit not mainstream ones. Stocks themselves can be just as speculative as crypto (GME comes to mind).

Besides, the OP is presumably interested in actively learning about the fundamentals of diversification, not merely asking for low-maintenance safe-ish portfolio options (in which case, buying an ETF would suffice). I'm just laying out different options across the entire spectrum. Personally, no one told me about virtually any of these options when I was starting out (presumably because they were similarly making assumptions about my risk tolerance level), but I wish they had. For example, reading about industry sectors is fine and dandy, but there's a subclass of stocks called dividend stocks that aren't a sector per se, but can be an investment strategy of its own. Index funds come up a lot in this type of discussions, but REITs do not, despite being pretty decent options as well. For crypto specifically, what almost no one mentions is that bitcoin is actually one of the more conservative crypto options compared to upstart altcoins. Etc. There's a lot of reading one can do across the board.

I'm very specific that crypto is not for everyone, but neither are things like shorting stocks, even though one might be more inclined to call shorting "real investing", whatever that means.

[mcintyre1994]

One option is that you stop picking and researching stocks yourself and you purchase index funds, which track the whole of the market. The idea here is that active decisions can be really good or really bad, and you either have to research them yourself or pay a higher management fee for someone who will actively manage a portfolio. Tracking the market is cheaper, generally performs well but not extraordinarily well over time, and makes everything much more passive. A really good short book that makes these arguments if you’re interested is Tim Hale’s Smarter Investing.

[girishso]

It's better to stick with the sectors you understand and have an edge over others, that's what Peter Lynch recommends in One up on wall street. It's difficult to follow this advice, especially when your sector loses steam, but you still have insights that outsiders don't have and over long term all sectors perform, see what's Pharma doing these days.

[giantg2]

Easy answer is ETFs or index funds.

As for understanding, follow the financial news and the news related to the top holdings of industry/sector specific ETFs.

[shoo]

baseline suggestion: don't try to actively manage your own investment portfolio and pick stocks. don't outsource management of your portfolio to active managers that charge high fees. outsource your investment to a diversified low-fee passively managed fund (e.g. those popular low fee diversified vanguard ETFs that use market cap weighting). Such passive investment approaches seem kind of dumb (like, surely one could do better by considering the fundamental economic value of businesses, not merely their market cap) but the average investor will end up wealthier by investing in passive ETFs.

One big downside of trying to manage your portfolio yourself is that you have many more opportunities to make unforced errors (particularly behavioural errors), e.g. trading based on emotion, trading based on poor decision making, etc. If you outsource investment decisions to an organisation with a disciplined process and low fees then you prevent yourself from making many of these errors.

https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street

https://www.bogleheads.org/RecommendedReading.php

http://efficientfrontier.com/

On another hand, if you do want to learn more about how to evaluate individual companies:

http://aswathdamodaran.blogspot.com/

https://www.berkshirehathaway.com/letters/letters.html

https://news.morningstar.com/classroom2/course.asp?docId=142...

http://www.efficientfrontier.com/ef/401/fisher.htm

https://twitter.com/WallStCynic

All that said, research has shown that individual stock selection has a relatively minor contribution to overall investment portfolio return compared to other factors such as asset allocation and (especially) the amount you invest in the first place.

[sloaken]

If you really want to be educated, I recommend visiting morningstar. They cover 9 basic sectors of growth, value, mixed in a matrix with small, medium, and large. This is for Mutual funds, which correlate to some ETFs.

[kypro]

IMO holding individual stocks in most cases is silly. Unless you're willing to put in serious work (several hours a day) into deeply understanding companies and sectors so you can adequately value a stock you're probably better off just buying an index fund. And even if you do put in the time to understanding the investments you're making, you're still statistically unlikely to beat the market over extended periods of time.

As to whether you should diversify, there's really no right answer and it depends largely on your risk profile. Less diversification will typically provide better returns at the risk of greater losses. If you're really confident you know what you're doing arguably less diversification is better. More diversification generally means lower returns, but you'll also be less likely to get wiped out in the event of something like a dot-com bubble. With tech valuations being as high as they are today, it probably wouldn't be a bad idea to have some diversification outside of tech.

If you decide you still want to hold individual stocks and also want more diversification you could split your portfolio 50/50, with 50% in index funds and the other 50% in some individual companies you really like. Alternatively, you could pick some solid blue chip stocks to add to your portfolio. Stocks like BRK.B and KO are IMO great stocks to hold if you want some safe and steady returns.

Whatever you do you should be prepared for a worst case scenario. Over the last year or so I've warned people repeatedly that stocks like TSLA could lose up to 90% of their valuation and potentially never reach new highs if market conditions change. If you're portfolio is full of stocks with a risk profile similar to TSLA it's really just a matter of time before you get wiped out. Having 10% exposure to a stock like TSLA isn't necessarily a bad idea, but a portfolio full of stocks like TSLA is a guaranteed way to look like a genius until the market changes and you lose everything.

Another thing to remember is that every company goes to 0 eventually. Today I see a lot of people speak about tech companies that have only been around for a decade as being "long-term holds". Historically this isn't true. If you don't believe me just look at the largest companies in the world from just a few decades ago. If you're holding individual stocks you need to be occasionally repositioning your portfolio to reflect changes in the economy. This means you'll be paying more tax than if you just held an index fund over several decades so you also need to factor this in.

My guess is that the fact you've asked about diversification suggests that you probably do need to diversify a little.

[dyeje]

Index funds.

[tylerjaywood]

Yes