Sunday, November 20, 2011

It's Not Rocket Science: Part II

Tom Bradley is a founder of Steadyhand, a different kind of mutual fund company that focuses on low-fee, low-turnover portfolios where managers are encouraged to seek value wherever it can be found. Bradley summarizes his thoughts on how to beat the market in his book It's Not Rocket Science, summarized below

If you're comfortable with your entire portfolio, Bradley argues you may not be diversified enough. When trends have been going on for several years, portfolios become less and less diverse, as investors become convinced that what was successful in the past will continue to be successful. This is dangerous, however. Energy stocks and real-estate will not go up forever!

The same goes for geographic diversity. If an investor believes a country or a group of countries is going to outperform the rest, he is probably not diversified enough. Strong past performance usually indicates a correction will occur.

That's not to say Bradley believes in owning a multitude of stocks. He is a proponent of portfolios that are far more concentrated than the average mutual fund. Statistical analyses suggest the diversification benefits become negligible after about 20-25 holdings. But a caveat is that these holdings should not all carry the same themes, such as being based on endless growth from "Chindia" and rising oil prices.

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