Portfolio Diversification: Less May Be More
Photography by Wes Battoclette
A Starbucks Java Caramel Brulee Frappuccino Grande, a warmed Toffee Doodle cookie and a cheese danish croissant … all scrumptious, but too many bites might wreak havoc with your stomach. So it goes with portfolio diversification.
Too much diversification and there goes your portfolio, leaving you with a bad case of diworsification, says Carter F. Randolph, PhD, president and chief investment officer of The Randolph Company, a registered investment advisor in Blue Ash.
Diworsification is a catch phrase referring to companies that tried to diversify their portfolios but decreased their overall returns. Common sense diversification might mean more return in the long run, says Randolph.
Many people were advised to diversify their portfolios in 2008 and 2009, based mainly on the Markowitz Portfolio Theory, which attempts to explain risk and expected return mathematically to help investors in establishing a portfolio offering a maximum return for a minimum amount of risk, he explains.
“It’s just a fancy way of saying, ‘Don’t put all your eggs in one basket,’ a pretty good rule in theory.”
People invested in hedge funds, emerging market funds, frontier markets, arts, real estate, gold and commodities – every kind of asset available – to reduce risk and make more money.
“People who had diversified portfolios may have reduced some of the volatility, but in doing so, also gave up a lot in returns,” Randolph says. “Investors started picking up on the idea that perhaps all that diversification was not working out as it was supposed to. Yes, there were some periods of great returns, but accumulatively, they were not as great as anticipated.”
Randolph’s antidote for diworsification? A keep-it-simple approach:
• Keep the fee low.
• Diversify for the ability to enhance your portfolio, not to make sure you have invested in every asset under the rainbow.
• Don’t put your eggs in one basket, but don’t have so many baskets that you can’t carry them.
• When everyone is saying, “This is what you have to do,” think twice.
He advises investing in established, at-home companies with names like Procter & Gamble, Johnson & Johnson, Intel – companies known for paying a dividend every year and don’t have a lot of debt on their balance sheets. Basically, look at a lower level of risk and a long record of selling products.
The Randolph Company is located at 4200 Malsbary Road, Cincinnati, OH 45242. For more information, call 513.891.7144 or visit their website at www.therandolphcompany.com.