Monday, December 10, 2007

Diversification - is it really essential?

Portfolio diversification means one should hold assets from different markets or sectors in order to reduce the risk.

I believe that in all the books I have red, no one question the necessity of diversification in a portfolio. Further more, the sample portfolio constantly contains equities along with commodities and I find this very confusing.  Even in a bear market there are a few stocks which rise. So, instead of looking at other markets I try to improve my stock picking in a specific market.  Building a mechanical system which perform well in different markets is very hard. I have tested my system in different markets like the FTSE, DAX, VSE and The Shanghai stock market and it worked well but since I concentrate on the Nasdaq I made several changes which showed great results on this market in particular.

So, is using one market acceptable? Let me know what you think of diversification.

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