Diversification, Momentum And Risk

Three assets as a portfolio is apt to be unsettling, however, perhaps it should not be. One of the assets (the stock or bond index) is always a fully diversified asset. The other two assets (from the momentum selections) are also diversified selections, generally narrower than total markets. Gold which is a “run for the hills” asset is an exception. Four of the assets in the Mom listing of ten are cash or near-cash selections, allowing the momentum selection easy access to safety selections and the equity assets are diversified, at least within defined classes.

For most, three assets will be off-putting, although perhaps it should not be given the diversified nature of the assets. Diversification is good up to a point. Beyond that point, diversification for the sake of diversification is a waste of time and money. (Statistical analysis of stocks from different industries suggests that diversification beyond ten stocks provides little to no additional risk reduction.)

Additional methods to achieve value results (in terms of the risk-return trade-offs) will be explored and reported on in subsequent articles.

Good luck and successful investing.

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