Looking for a better investment alternative? ✼lick here« But they can’t help manage the investment risk in your personal portfolio, college savings plan or company 401K retirement plan account. Pie charts look nice coming out of a color printer, and they probably would also look great in 3D. Their “set it and forget it” style of investing works well for them but not necessarily their clients. They obviously don’t make pie charts that guarantee investment returns as nobody in the financial industry can, react to real world stock market price moves, or help to preserve company retirement plan principal in the early stages of a stock market decline. The measure of how something works is a function of how well it is used, and pie charts are clearly used in the wrong way by most financial advice professionals. So, pie charts can’t really do what they are advertised to do. How many mutual funds do you really own? How many individual stocks are inside all of those mutual funds? Increasing from 30 all the way up to 1,000 different securities didn’t materially improve the portfolio’s diversity.Ĭonsider that the next time you open up your quarterly statement. In other words, increasing from one or two securities up to 30 had a big improvement. They concluded that a portfolio’s diversity stopped improving once you had more than 30 different securities. There was a fascinating study done in the late 1970s by Elton and Gruber. We call this phenomenon “stock overlap” or “stock intersection.” You may own 10 different mutual funds, but the largest holdings in each fund are the same companies. Making matters worse, investors with multiple different families of mutual funds often own the exact same companies across the different families. They are probably much more correlated to the market than they realize. Unfortunately, even though a pie chart may make it look like an investor is safely diversified, it’s probably not the case.
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