A question that comes up from time to time is whether it’s a good idea to purchase a specific investment versus a balanced and diversified portfolio consisting of many different investments.
For a few months Bitcoin was getting a lot of press. Some wondered if they should invest in it because its value was skyrocketing.
Then there was excitement about owning shares of companies that were going to distribute marijuana in Canada.
My recommendation is not to take unnecessary investment risk. Don’t speculate.
There are several reasons for this.
Assume you did gamble and invest in one specific stock. Two things could happen.
First, the stock could go up and you could make money. The problem is that this lucky move will create the false expectation of having the magic touch for picking winners.
You are more likely to try your luck again, and eventually you will lose.
Second, the stock could decline in value and you would lose money.
Some readers might interpret this as being too negative. This is not negativity, it’s reality.
Professional investment managers rarely outperform the markets they invest. If they can’t win with stock picking and market timing then it’s unreasonable to expect you could have better results.
One of the fundamentals is to have a well-balanced and diversified investment portfolio. The best defense against risk is to diversify that risk.
Ideally you should strive to have a low cost, tax effective, investment portfolio.
By owning hundreds or even thousands of different stocks you are effectively buying the market. You are buying capitalism and the companies in that system.
There have been countless companies that have eventually gone bankrupt. Investors in those companies will have suffered significant losses.
Historically stock markets have declined, however they always regain those losses and go on to new highs.
Markets are unpredictable. A balanced and well-diversified portfolio will help counter performance swings.
Peter Watson is an agent of, and securities products are provided by, Aligned Capital Partners Inc. (ACPI). ACPI is a member of the Investment Industry Regulatory Organization of Canada (IIROC) and the Canadian Investor Protection Fund (CIPF). The opinions expressed are those of the author and not necessarily those of ACPI. Peter Watson provides wealth management services through Peter Watson Investments.
