Concentration vs Diversification
Concentrate to accumulate, diversify to protect.
When you diversify do it via a broad index or specific individuals, who through careful analysis you judge to be extremely competent and capable of significantly* outperforming the index.
Remember that indices are not static beasts, they are actively managed funds of the leading companies. Failing or at least flailing companies are cut from the list while successful and growing companies are added. That’s a difficult investment strategy to best, especially when actively managed fund’s fees are going to be meaningfully higher.
- Concentration means 2-20 positions. Small business people can put all their eggs in one basket, the rest of would be foolish to do so.
- Significantly is greater than 3%. As you’ll loose around 1% in fees compared to an index fund or ETF and you want at least 2% return for taking the individual risk.
Index Funds and ETFs in Australia
There are two main choices, though others do exist:
- Vanguard Index Australian Shares Fund charges a management fee of 0.75% p.a. for the first $50,000, then 0.50% p.a. for the next $50,000 and 0.35% p.a. for the balance over $100,000. There is also a spread of .2% on purchase and .1% on withdrawal.
- State Street Spiders ETFs on the top 50 or top 200. Management costs are 0.286% and there will be the bid/ask spread.
Index funds and ETFs are the most suitable choice for investors who do not have the time or interest for investing, but desire exposure to a particular asset. I wrote more about investing in Australia here and its related posts.
I’m still working on reducing the number of US equities we hold. I forget the peak, maybe 46. We’re down to 30 now, with three more on the chopping block followed by five more waiting a final thumbs up or down. Pfizer is our largest position.
My son has embraced his creative powers, this image is from his Gorillaz Demon Days concept series. He drew a picture for each song on the CD.
Related posts:
Leave your response!