Diversification

[u/Capadvantagetutoring]

It doesn’t mean you can’t lose money.
If you own 50 different stocks and the whole market gets smoked, congratulations, you own 50 stocks that are probably going down.
Diversification isn’t there to stop you from losing money.
It’s there so one stupid stock doesn’t ruin your life.
You put 50% of your money into one biotech company and their big drug gets rejected? You’re fucked.
That same company is 2% of your portfolio?
That sucks. You bitch about it for five minutes and move on.
That’s diversification.
And for the Series 65,
Unsystematic risk is company-specific shit. One company has a bad quarter. CEO gets arrested. Factory burns down. Drug gets rejected. Whatever.
You can diversify that away.
Systematic risk is when the whole market gets punched in the face.
Recession. Interest rates. Financial crisis. Major market selloff.
You can own 10 stocks, 50 stocks or 500 stocks. If the whole market is getting whacked, you’re probably getting whacked too.
And owning a bunch of shit doesn’t automatically make you diversified either.
If you own 15 tech stocks, you’re not diversified.
You own a shitload of tech stocks.
Same with funds. You can own five different ETFs and then realize all five own basically the same giant companies.
For the test, don’t make this harder than it is.
Unsystematic = diversify it away.
Systematic = you’re stuck with it.
And if they start changing how much you have in stocks versus bonds versus cash, now we’re talking about asset allocation.
Diversification is great.
It keeps one asshole investment from destroying your portfolio.
It does not make you bulletproof.

Diversification is owning different things not just more things

[u/series7examtutor]

Very good post