Quote Originally Posted by TheHeathens View Post
Firstly, I never said it guaranteed growth in any post - I said it was an effective hedge against an economic downturn. Even with your simplistic example of 4 companies, there is a chance that you would lose less money (being an effective hedge doesn't necessarily mean you make money) than if you'd ploughed all of your money into one.



Let's put this to bed - you're intentionally missing the point now.











Ok, so where did I say at any point it would guarantee performance.




Firstly, that's an very poor example - you could have foreseen the fact that a smoking ban was going to come in, because it had done in Ireland and a few US States to name but two beforehand. You should have asked that question.

Secondly, where's the diversification in just buying just one pub? You've perfectly proved my point with that example! If you ploughed all your money into one investment (like gold, or the pub in this example) you shouldn't be too surprised if it falls in value.

Diversification would be (for example purposes) buying a pub, and shares in Tescos (whose alcohol sales have risen). You wouldn't stop there though, because statistics show a correlation between Pubs and Supermarkets so you'd invest in something not related to them (for example, gold and gilts) and spread your investment around. The more uncorrelated your investments, the better the diversification. It's a very simple concept.

What I think you are trying to illustrate is called Systematic (or Market) Risk and is caused by things like legislation changes, inflation rates, exchange rates, political instability, war and interest rates. This is just a risk you have to accept as in investor (and applies to gold too) but you can make educated guesses about the likely outcomes.

Unsystematic Risk is specific to a company, industry, market, economy or country; it can be reduced through diversification (i.e not putting all of your eggs in one basket)

Ok, I'll give you a working example of one of our portfolios for someone with a risk profile of 6/10, but first, you need to take a few things into account:

1) These are invested in collective funds. Collective funds invest in about 40-80 individual shares (different companies within the same area - e.g UK All Companies) so you already have some diversification there.

2) The different funds are (generally) invested across different geographical areas / sectors so you've got further diversification.

THIS DOES NOT CONSTITUTE ADVICE!

Ok, the funds:



You can see that over the last year, the portfolio has lost 7.64% (remember I said it was no guarantee for positive performance) but the FTSE 100 has lost 22.53% over the last 1 year.

Over 3 years, the portfolio has gained 18.04% whilst the FTSE has lost 2.24%. Just a footnote - investing in shares should be seen as a minimum of a 5 year investment

Now the diversification bit:

Ok, notice the asset allocation split. Most is in equities (shares), but there's a little bit in cash and about a third in fixed interest.

Next the Sector allocations show you where the money is invested (product areas) and the Region Allocation show which countries the portfolio is invested in.

Lastly, look at the top 10 holdings: You've got Gilts, Oil, Pharmaceuticals, Telecommunications and Banking (HSBC are largely unaffected by the credit crunch). These do not react to the market in the same way.

Finally, the performance over 3 years v the FTSE 100:


They've pretty much been the same until the start of the Credit Crunch a year ago, when the diversified portfolio has come into its own, outperforming the UK shares (FTSE 100).

That's just one example - your problem is that you're thinking on a far too small level. Across those funds above, there are probably 400 - 600 individually held shares spread across Europe, Asia, North America, Latin America, UK, Oceania. Within each of those areas, you then have further diversification; for example, China banks, China Mining Companies, China Textiles, UK Banks, UK Oil, UK Gilts.

I'm not going to waste any more time on this, because it's clear you know nothing about it and are arguing for the sake of it. I recommend you visit the following website for a crash course : http://www.investopedia.com/?viewed=1
Heathens you're a waffler. You're waffling to divert attention from the crux.I don't appreciate your snide comments either, about my education. You either want to debate properly or you want to waffle.

You stated that diversification is good. I say not necessarily. In other words it might be or it might not be. If I invest in the heroin industry in 3 countries is that good? If I invest in 1 or 2,3,4,5 pubs(diversification) and they all fail is that good?

Now you say that people should know that the government was going to bring in the smoking ban. How do they know? Because they did it in other countries? Why do you think countries have their own laws? They don't always follow suit.

The reason you advocate diversification is precisely because of the above. You don't know what's going to happen next. If you did you'd invest in one company. The most successful one.

To make this clear to anyone interested in this debate, I'll prove my point: If you invest in three companies and we'll assume for the sake of argument, they're all successful. In that case it's very unlikely they'll all succeed to the same degree. Therefore you didn't make the right decision, because if you'd invested in one(the most successful) you'd have got a bigger return than diversifying in three.

Diversification is for gamblers. Like people who play roulette and put five one pound chips on each square, in the belief that that, is better than placing one five pound chip on one square. It's called gamblers fallacy.