Diversification

7 May

Diversification is great and all, if you want to climb your way up slow and steady. For me, I invest in bigger chunks depending on my risk tolerance to that one particular stock. I’m not saying this strategy is for everyone but I have invested in a few stocks that have certainly leap further than the rest of the stocks.

Currently, Bank of Montreal (BMO.TO) and Chemtrade Logistics (CHE.UN.TO) are two of my largest holdings in my portfolio. My main objective was create a steady stream of income from these two stocks. To date, I have collected in dividends of $1066 from BMO and in distribution of $2602 from CHE.UN. The uncapitlized return of my stocks is 8.78% ($4221.77 of $48059.23).

Google (GOOG) is my third biggest holding. I orignally bought 50 shares of GOOG, half of the shares were on MARGIN. My main objective was price appreciation. Shortly after I bought into GOOG, share prices went below my buy in price. I was in the red for a couple of months. This wasn’t a good feeling, but I stayed true to my objective. When GOOG finally climbed out of its depressed share prices, I sold half of my holdings that were on MARGIN for mere $100 gain. To date, my uncaptilized return of GOOG is 39.91% ($6,115.30 of $15321.95).

Ok, I bought these three stocks roughly around the same time in Spring/Summer of 2012.

What if I wanted to diversify and buy a whole bunch of stocks in equal parts?
Let’s I have $65,000 to invest, I want to buy 10 stocks in equal parts.

1) BMO and CHE.UN uncaptialized return would be 8.78% ($1141.40 of $13000.00).
2) GOOG uncapitalized return would be 39.91% ($2594.15 of $6500.00)
3) Seven miscellaneous stocks can go either way up or down… averaging let’s say 5% ($2275.00 of $45500.00)

My cost of trading would be 7x more. I would have to find seven other stocks to fill out my portfolio. Maybe, some of the stocks I don’t really want to put in my portfolio, but I am forced to because I wanted to be diversified.

Let’s compare the two strategy in uncapitalized return:
3 stocks vs 10 stocks
$10,337.07 vs $6,010.55

So is diversification better in this scenario  Or is it wiser to pick the RIGHT stock accordingly to your risk tolerance?

In hindsight, if I were to pour everything into GOOG, I would be in a better scenario don’t you think?  But with everything, what are you willing to risk?

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