Wednesday, November 28, 2007

Discovering common sense in investing

Since I converted my RSP from a concentrated stock position to low-cost index funds, I was pleased to see that, in the following weeks, my "old" portfolio performed significantly less well than my new diversified holdings. Given that my old stock holdings were banks, it's not surprising that they've been in relative free-fall for the past couple of weeks, in anticipation of the end of this "all-about-sub-prime" fiscal year. I have to admit that, as I've watched my index funds hold steady relative to the sliding bank stocks, I've felt more than a little cocky about my decision to diversify.

Well, today I've had a dose of common sense to cut me back down to size. Canadian bank stocks are on the rebound in the wake of Bank Of Montreal's year-end results, as investors can finally start to quantify the impact of the sub-prime mess on the Canadian market. I'm now seeing the down-side of a diversified portfolio: just as index funds drop in value more slowly than individual stocks, they are also slower to rise in value.

There's no question in my mind that diversification was the right move. My exposure to radical price swings in individual stocks is greatly reduced, and the fact that 90% of my holdings are in equities means that I still have a pretty aggressive portfolio. I just have to accept that, although I should do well in the long-run, there may be times where my "old" portfolio will leave me in its dust.

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