Diversify or Diworsify?

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I think for small investors like me, one common mistake is “diversify”. Wait, isn’t “diversify” the first lesson we are taught to reduce risk? Yes, but as Peter Lynch said, “diversify” could mean “diworsify” too.

For example, I have 6 stocks in my portfolio now: CROX, HMIN, MR, GSIT, NINE and SBUX. Some are winners (CROX), some are losers (NINE). Had I hold all in CROX, my return would be much better. Of course you would say I had more risk too.

I agree, to some extent. The main problem with diversification is it took too much time and effort to keep track of all of them; and the return is not proptional to the “time spent”. For example, I spent a lot time on researching “NINE”, but it consistently turns out to be a loser.

Another thing is even with 6 stocks, you may notice I am still volatile to “Chinese drop”, I mean the big drop on Feb 27 this year. Holding different stocks does not necessarily lower risk, if the stocks are of similar type; HMIN, MR are recent Chinese IPO, they tend to go in same direction; I used to own HLYS which goes with CROX, both are shoes makers.

So what should I do? I am thinking consolidation, at some point, I will reduce my holding to 3 or 4, a number I feel more comfortable to deal with. I guess that’s one reason I am not a fund manager too 🙂

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