How Diversification Works

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Diversification is one of those things you've probably heard about as something you need to do, but how does it actually work, and why is it considered so important? We explain this and more!

This video was sponsored by Squarespace

DISCLAIMER:
This channel is for education purposes only and is not affiliated with any financial institution. Richard Coffin is not registered to provide investment advice and as such does not provide recommendations on The Plain Bagel - those looking for investment advice should seek out a registered professional. Richard is not responsible for investment actions taken by viewers.

[presidentfist]

I like how the thumbnail gives you the answer

[Skilliard]

I do about 80-90% in index funds for diversification purposes, then about 10-20% are in a few companies I do research on that I have a strong belief will outperform the market. So far has been working quite well for me.

[fzigunov]

I'll be the voice of the internet and criticize your statement between 3:28 and 3:44, because I think it is a common fallacy among people in the financial market in general. Restating here the important bits:
"banks benefit from rising interest rates, (...), while real estate companies benefit from falling interest rates (...). Holding investments on both, therefore, reduces the risk of your portfolio taking a hit from interest rate changes - one way or the other"



Let's assume what you said is roughly true. If banks benefit from rising interest and real estate companies benefit from falling interest rates, then their stock movements are indeed correlated with the interest rate movements. Indeed, the correlation coefficient would be close to -1, instead of zero. Therefore, holding both stocks actually is a bad idea, because they cancel each other's returns, while still being subject to market risk. A position like that would have actually a negative alpha.

[vikramsingha]

Diversification though a very common topic in investment, you have made the video very balanced & comprehensive with different approaches and at the same time succinct. The cherry on top are your great graphics and editing.

Well done Richard!

[IronForgedUnderPressure]

This video was made 2 years ago. There hasn’t been trading fees at least in the US for way more than two years. Removal of trading fees and fractional stock purchases really revolutionized the ability for average people to invest on their own. God, I remember $7 trading fees from Fidelity. It really sucked to be down as soon as you make a purchase.

[joecurran]

I know you covered gold but can you do a video on commodity trading generally and how to get into this? Also, a video series of the various bonds investors can use would be great!

[vitorioyosifov]

Thanks Richard! I'm doing CAIA now and you've explained everything much easier :D.

[mohammadrezasabouri]

One of your best videos so far, great job!!

[sjoerdtilmans]

I was looking for this tool for a while, thanks! It is very useful.

[vittoriochichiarelli]

Could you talk about Japan Massive Debt and Italian Situation, like you did in Greece Video?

[jlien]

You make such awesome and educational videos ! Great job again

[carlosveritas]

Thank you so much, I was looking forward for a video like this. It's a blessing that your channel exists.❤️

[muffemod]

6:22 "high transaction fees..." I don't think any of the major brokers do this anymore. The fees are usually waived at most major places as long as you do them online.

[alexandrosvoukantinovits]

Cool video! Do you think you could make one about the Greeks (Alpha, Beta, Sigma, etc) and maybe shed some light on the Dynamic Beta vs Alpha?

[ichoudhury]

Great video. Maybe tackle dividend vs growth vs spec/growth? Portfolio pros/cons next time?

[qjsharing]

I've been pondering how to advise a friend who is very interested in maximizing the pay down on their mortgage. On the one hand, they are not diversifying and are just hedging against the risk of future interest rate changes. And we all know how paying down debt is mathematically similar to investing at that interest rate. On the other hand, if he doesn't, he's technically borrowing to invest elsewhere. Owing $10, 000 on your house and buying Cameco is the same as having a paid off house and then borrowing $10, 000 against it to buy those shares

[mtaracenag]

About the effect of the number of stocks on volatility (around 5:47), I've always though that it only applies for randomly selected stocks. Is that correct? For active management, stock selection is not random, so maybe the graph does not reach a plateau in the same way.

[chrisglaze]

Diversification is the key to a well rounded portfolio

[jetah]

"The way to become rich is to put all your eggs in one basket and then watch that basket.
" ~Andrew Carnegie


"Keep all your eggs in one basket, but watch that basket closely." ~Warren Buffett

[Knightshield]

1:27 those are some risky bagels to invest in