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Mint
15-05-2025
- Business
- Mint
Diversification isn't about how many stocks you own—it's about which ones
Scrolling through X last week, I stumbled upon a yellowed clipping from a 1996 issue of the ABA Journal titled 'Spreading the Wealth.' It was a throwback to a slower era—long before robo-advisors and trading apps. It got me thinking: how far have we really come in our understanding of diversification? The article, written by Jon Newberry, explained the mathematics of diversification with a clarity that's often missing in today's personal finance conversations. Despite all the advances in investing—smartphones, AI trading, and global markets—the core principles of sound investing haven't changed much since 1996. That old article was a timely reminder for me to revisit a topic I've often written about: the true role of diversification in an investment portfolio. I frequently hear from readers who proudly describe their portfolios as 'well-diversified." But when I look closer, many of these are simply long lists of holdings—dozens of individual stocks or mutual funds—that give the appearance of safety while creating new problems. One striking example: an investor held over 40 stocks, but the top five accounted for more than 60% of the portfolio's total value. The remaining 35? Too small to make a real difference, but still adding complexity, paperwork, and stress. Also read: Devina Mehra: Diversified or concentrated portfolio? It's an easy choice This brings us to a fundamental question that too few investors ask themselves: What exactly is diversification meant to achieve? The basic premise, of course, is protection against catastrophic loss. As investment legend Philip Fisher pointed out back in 1958 (and as cited in that ABA Journal piece), having "too many eggs in so many baskets" can mean that many eggs don't end up in attractive baskets. Diversification isn't simply about quantity; it's about intelligent risk management. The math of risk One of the most striking points from the article was a simple mathematical illustration. If a portfolio holds just one security, there's a 33% chance—based on their example—that the entire investment could be wiped out. Add a second, uncorrelated security, and the risk drops significantly. With three uncorrelated holdings, the chance of losing everything falls to just 4%. By the time you have five well-selected securities, the risk of total loss drops below 0.5%. The exact figures may not hold in today's market, but the principle behind them remains powerful. However, this is where many investors misunderstand diversification. They assume that more is always better. In reality, diversification comes with diminishing returns. The leap from one to five stocks delivers a big reduction in risk. But the difference between holding 20 and 50? Minimal at best. Meanwhile, the costs—more time, more paperwork, more mental clutter—keep piling up with each new addition. Also read: When math mistakes cost more than money Real diversification isn't just about quantity but quality— spreading investments across assets that respond differently to various economic conditions. This means diversifying across company sizes (large, mid, and small-cap), sectors, geographies, and even asset classes (equities, fixed income, perhaps some commodities). A truly diversified portfolio might contain fewer individual securities than you'd expect, but they're carefully selected to complement each other. Keep it simple A handful of well-chosen mutual funds can provide all the diversification needed for the average investor. A large-cap fund, a mid/small-cap fund, and an international fund cover most bases on the equity side. Add a debt fund for fixed income exposure, and you have a robust portfolio with just four holdings. Each fund already contains dozens of securities selected by professional managers, giving you the benefits of diversification without the administrative headache. Also read: Why is asset class diversification more crucial now than ever? The article mentions that the legendary Peter Lynch, who ran the Fidelity Magellan Fund, sometimes owned over 1,000 stocks. What it doesn't mention is that Lynch managed billions of dollars and had a team of analysts helping him track these investments. For the ordinary investor, attempting to replicate this approach is not just unnecessary—it's counterproductive. Excessive diversification also has a significant psychological cost. When your portfolio contains dozens of holdings, staying properly informed about each one becomes virtually impossible. This often leads to passive neglect of large portions of your investments—precisely the opposite of the engaged, thoughtful approach that successful investing requires. I advocate a middle path when it comes to diversification—not too little, not too much, but just enough. For most investors, that sweet spot lies somewhere between five and ten well-chosen investment vehicles. The goal is to balance risk protection with practicality—enough diversification to guard against major losses, but still manageable enough to track and evaluate properly. Also read: PMS vs mutual funds: How have portfolio managers fared on returns? It's also important to remember that diversification is no substitute for due diligence. A portfolio filled with low-quality or overlapping investments—even if large in number—won't outperform a smaller collection of carefully selected, high-quality assets. When it comes to investing, quality always trumps quantity. Ultimately, effective diversification isn't about scattering your money as widely as possible. It's about placing it wisely. After a point, adding more investments doesn't increase your safety—it just increases your workload. And, as in many areas of life, when it comes to building a smart portfolio, simplicity often beats complexity. Dhirendra Kumar is the founder and CEO of Value Research, an independent investment research firm
Yahoo
07-04-2025
- Business
- Yahoo
Experts sound alarm over worrying trend impacting home insurance policies: 'It's going to become increasingly difficult'
The insurance market is becoming increasingly unstable because of powerful natural disasters. The Southern California wildfires, which caused billions of dollars in damages in January, are just one of the recent extreme weather events concerning legal experts. As detailed by the ABA Journal, homeowners in Southern California are now dealing with insurance problems in the wake of the wildfires. Prior to the destructive blazes, private insurers such as Farmers, Allstate, and State Farm had pulled out of the Golden State or had at least reduced their offerings. All in all, according to the Insurance Journal, fire risks pushed seven of 12 of the largest insurance companies to take such action. Attorneys expect more private insurers to follow suit. "A big problem is not being able to find homeowners insurance with any reputable company," said business litigator John Duffy, who moved to a different area with his wife even though their home survived the Palisades Fire and they haven't had insurance difficulties like many of their neighbors. "There's no coverage for smoke and ash remediation," Duffy explained. "And there are lots of toxins … so you can't get back into your house." In California, a growing number of homeowners are dependent on the FAIR Plan — launched by the state in the 1960s as a last-resort insurance solution. The ABA Journal reported this has left residents "grossly underinsured," according to David Shaneyfelt, an attorney who represents policyholders filing claims against insurance companies. California isn't the only state in the country facing insurance troubles because of extreme weather events supercharged by the warming climate. For instance, from 2018 to 2023, Florida had four of the top 10 counties with the fastest-falling home insurance coverage rates, leaving residents to turn to the Sunshine State's last-resort insurer, the Citizens Property Insurance Corp. Miami attorney Francesco Palanda, a partner at Hinshaw & Culbertson, told the ABA Journal that he expects private insurers to continue to pull their coverage — or at least increase rates while adding coverage exclusions to their policies to maintain profitability in high-risk markets. "It's going to become increasingly difficult to find insurance," Palanda said. "... What happens is, people are getting a lot less coverage for a lot more money." Do you think your home has good insulation? Definitely It's just all right It's good in some rooms Not at all Click your choice to see results and speak your mind. Lucy Wang, deputy commissioner and special counsel at the California Department of Insurance, told the ABA Journal that regulatory reform could help bring insurers back to the Golden State, though policyholders would likely pay a premium for coverage. Palanda echoed that sentiment, saying, "Insurers will keep doing what they can to remain viable." While state-run insurance plans are at least providing some coverage and climate-resilient structures can mitigate risks associated with extreme weather, cooling down the planet's temperatures could help bring balance back to the insurance market in the long term. With the bulk of the excess heat-trapping gases in our atmosphere generated by dirty fuels, many governments and companies are investing in clean energy projects, such as solar and wind farms. You can get involved by signing up for community solar, installing solar panels, or upgrading to energy-efficient appliances that pull less power from a grid that is heavily reliant on dirty fuels. Join our free newsletter for good news and useful tips, and don't miss this cool list of easy ways to help yourself while helping the planet.
Fox News
22-02-2025
- Politics
- Fox News
American Bar Association votes to stop enforcing DEI standard for law schools
The American Bar Association (ABA) has voted to suspend its diversity, equity and inclusion (DEI) standard for law schools as the Trump administration looks to gut all programs and initiatives associated with DEI within the federal government. The council of the ABA Section of Legal Education and Admissions to the Bar voted to pause its current standard, known as Rule 206, until Aug. 31 while it reviews a proposed revision to the rule, according to the ABA Journal. The vote took place at the council's quarterly meeting in San Antonio Friday. The council's standards committee said it would assess the proposed changes in light of recent actions by the Trump administration to ensure it can enforce the standard in compliance with the law. The Trump administration has threatened cuts in federal funding for academic institutions and universities that continue with DEI programs. Trump has also issued executive orders to target DEI in the federal government and private sector. Daniel Thies, chair-elect of the council and co-chair of its Strategic Review Committee, said the move to suspend the standard was necessary. "The committee's view is that with the executive orders and the law being in flux, it would be an extreme hardship for law schools if our standards were to require them to do certain things that may cause them to take more litigation risks and potentially violate the law," Thies said, according to the ABA Journal. Members of the council's managing director's office will visit law schools this spring and provide written guidance, the ABA Journal reported. Attorney General Pam Bondi hailed the decision as a "victory for common sense." "Yesterday, the American Bar Association voted to suspend enforcement of Rule 206 - a DEI requirement for the student bodies and faculties of law schools," Bondi wrote on X. "This is a victory for common sense! We are bringing meritocracy back to the legal system." The Trump administration is on a mission to gut all programs and initiatives associated with DEI within the federal government, arguing it has lowered standards and promoted a woke agenda. In his first week back in office, Trump signed an executive order ending DEI offices and initiatives across the federal workforce. He followed those up with two executive orders banning "radical gender ideology" and DEI initiatives from all branches of the U.S. military. A federal judge on Friday granted a preliminary injunction for sections of the Trump administration's executive orders on DEI, ruling that parts of the executive orders likely violate the Constitution and free speech rights. The injunction largely blocks the sections of Trump's orders that seek to end federal support for programs considered DEI-related and prevents the Trump administration from canceling contracts it believes promotes diversity, equity or inclusion.
