Portfolio distribution: Diversification

A very good comment about portfolio diversification from Murali, my co-author to renewable energy blog. By the way, he is the guy who first pointed me to look at alternative ethanol energy even before president's State of Union speech.

I agree with him that international and metals are missing from my portfolio. distribution. I, for one, have not been able to fully understand the commodity market. I know what moves them and when, but have not had time to look into them fully. And so have stayed away from them. I did mention in my where to invest post about looking at commodity this year. In fact, that is one of my new year resolutions to understand the commodities market.

About international, I should thank Murali to get this to the front. I do have my 401K account (about 20% of my Ameritrade portfolio) in two international fidelity funds. One is a European fund and other a World fund. As I am young, both are aggresive growth funds. I will update "my current portfolio" with this too. I like following the market, but don't have time to follow everything, so this way I get exposure to international markets, but don;t have to actively follow them.

Most stocks that I buy have a story behind them. There is a logic to why they will go down or up. And as my logic unfolds, I gain from my positions. As I am not a fortune teller, many a times my story doesn't come true. So, when I notice that I was wrong, I close my position and look somewhere else. In fact, that is what happened with GNBT recently, it went up too fast and I couldn't find the reason why so I put a couple of orders so that the position closes earlier.

Now this may a cliche, but this is one of the lessons that I learnt from Warren Buffet. Never invest in something that you don't understand. You should applaud the self control of a man with about tens of billion of cash on hand and Nasdaq market booming. He didn't invest in technology because, as per his statement, he didn't understand them. I believe everyone should develop his/her investment style, but it's always good to learn from your and other's mistakes as well as success.

Finally an unrelated comment; you can over do diversification. Most academic studies have proved that you don't gain much reduction in volatility after 30 stocks. In fact, risk reduction from 20 to 30 stocks is also not big enough.