Posts with keyword portfolio-diversification→

In Part I, I discussed the two main and opposing theories of investing – efficient market theory (EMT) and fundamental analysis (FA). Here I talk about which one of these two can be thought as “correct”.
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(This post is a part of the series Basics of Finance and Investing.)

It did not surprise anyone when Warren Buffett, while recently hosting a group of business students from the University of Pennsylvania’s Wharton School (his alma mater) for a two-hour question-answer session, began by pointing out the folly of the efficient market theory (EMT). After all, his objection to EMT is as legendary as his support for fundamental analysis (FA), as the foundation for smart investing.
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“I did not know enough to be scared”

69-year old Earl Crawley, while making $20,000 a year as a parking-lot attendant, still amassed over $500,000 in investment asset. His secret? Two, in fact. The first is his good old habit of saving every “nickel and dime”, and the second is his lack of investing knowledge, summed up in his quote that I borrowed above.
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US stock market has just closed for the day with all major indexes again taking big dives: Dow Index is down by 387 points (a single-day 2.9% drop, 2^nd worst of this year), S&P 500 down 44 points (3% drop), and NASDAQ down 57 points (2.2%). In the rest of the world, London’s FTSE Index was down 1.9%, Tokyo’s Nikkei up 0.8%, India’s SENSEX down 1.4%, and Australia’s ASX up 1.1%. These are the times when many investors begin to ask if they should jack up their stock holding in foreign markets. After all, the domestic and foreign markets rarely move in lockstep, and having a chunk of my asset allocated to foreign stocks should minimize any impact of a major domestic slump.
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If we look at the data for a broad stock market index, such as the Dow Jones Industrial Average or S&P 500 Index, three things jump out of the page. The first one is good news – there is a strong upward trend in market movement over the entire recorded history. This means that holding onto a diversified portfolio should fetch significant gain over long term – a popular retirement strategy for many who still have several years left before hanging up their boots.
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  I am a scientist working in a US university, and I also study the dynamics of financial markets and their impact on our financial health. More...

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