Diworsification: The problem when you spread your portfolio too thinly
The concept of diversification has long been hailed as the holy grail of investing. The idea is that diversifying investments across different asset classes can reduce risk and create a more stable portfolio. However, there is a growing concern that diversification can lead to overdiversification and a poorly performing portfolio. This is known as deterioration.
deterioration is the result of adding assets to a portfolio simply for the sake of diversification without considering whether those assets actually benefit the overall investment strategy.
What most investors don’t realize is how strong the correlation is between most stocks, sectors, and indices. It doesn’t matter what group or type of stocks an investor holds in their portfolio. The bottom line is that almost all stocks fall when the stock market falls. The main difference is that some fall more than others, and there are two silent account killers shattering retirement dreams. That means investors who spread their money across multiple sectors and think they’re diversified and better protected couldn’t be further from the truth.
In fact, owning certain sectors can increase risk as sectors generally represent a smaller segment of the overall market and therefore can rise and fall faster than the broad index.
This can result in lower returns, higher costs and significantly increased risk. Diversification is a by-product of the buy-and-hold approach, which exposes investors over 50 to serious risk due to what’s known as risk of return.
Investors can avoid deterioration by exploring alternative investment strategies that can help them achieve their financial goals more efficiently. In fact, there’s a growing trend that’s seen investors questioning the old buy-and-hold strategy of the status quo.
h2 Tactical ETF investing: A different approach to building wealth/h2
An alternative investment strategy that is gaining popularity is tactical investing. Tactical investing allows investors to grow their capital without diversification. Rather than spreading investments across assets, tactical investing allows investors to focus on assets that are performing well and avoid those that are not performing well.
Tactical investing works by selling assets when they start to outperform and reinvesting the money in other assets that are increasing in value. This strategy is the polar opposite of the old buy-and-hold method used by firms like Fidelity, Schwab, and financial advisors in general. Tactical investing allows investors to avoid falling positions and instead focus on assets that have potential for growth.
What separates tactical investing from traditional diversification is that it doesn’t rely on simultaneously diversifying investments across asset classes. Instead, it relies on an asset hierarchy and rotates capital into assets that have the greatest potential for growth. One strategy that uses an asset hierarchy is CGS.
h2 The advantages of tactical investing are obvious/h2
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Tactical investing allows investors to focus only on the assets that are going up and avoid those that aren’t. This strategy can result in higher returns and lower costs as investors avoid paying fees and expenses for assets that do not contribute to their overall investment strategy.
In addition, investors can take advantage of market volatility through tactical investing. Instead of sitting out market fluctuations, investors can avoid falling prices altogether and limit their downside risk. Some tactical investing newsletters include strategies that can generate additional profits with inverse ETFs during market corrections.
h2 Top ETF brands for tactical investing/h2
When it comes to tactical investing, investors have many options to choose from when choosing an ETF. Some of the top brands that are good for tactical investing that I use are:
- Invesco ETFs such as QQQ, UUP and UDN
- State Street ETF SPY
- iShares ETF TLT
- Proshares ETFs PSQ and SH
Overall, these top ETF brands offer plenty of choices to meet the specific needs of investors looking to achieve financial efficiency through tactical investing.
h2 Final Thoughts/h2
While diversification has long been recognized as a key strategy for building a successful investment portfolio, the concept of deterioration highlights the potential downsides of diversifying your portfolio.
Instead, investors can consider growing their capital through tactical investing without diversification, reinvesting their money in different assets that are increasing in value and avoiding holding positions that are declining. By carefully selecting the right ETF across assets, investors can accelerate their portfolios to help retire earlier and enable retirees to live richer lives.