Attempting to put together a truly well-diversified portfolio can be a difficult task. Without using complex computer algorithms and portfolio theory, investing in a portfolio without a substantial amount of systematic risk means investing in a sufficient number of companies, typically weighted according to the “market portfolio” or a basket of companies comprising the broader stock market.
In attempting to diversify without tacking on excessive trading fees, many investors have focused their efforts on buying sector-specific or index-specific Exchange Traded Funds (ETFs) to manage the diversification headache without the management fees and hours of research associated with building a portfolio from scratch, or buying a mutual fund. The benefits of the ETF industry have been widely studied, with most passive investors benefiting from the lower fees associated with such index or sector-focused funds.
For enterprising investors wishing to spend more than a few hours per week assessing and analyzing stocks, having a portfolio of ETFs as well as additional investment in specific sectors or specific companies can be a decent strategy, should such an investor see greater returns over a given amount of time in a specific stock or industry. Choosing which stocks or industries to buy can be the difficult part.
Watching what other iconic investors such as Warren Buffett are choosing to focus on can be one way of narrowing down a list of companies to choose from to a smaller, more focused list based on the investment research others have done. Building one’s own valuation model and/or building some sort of investment matrix or framework can be another way to pick and choose stocks in a more selective and methodical manner.
Invest wisely, my friends.
