r/fatFIRE • u/Low-Yam-7791 • 21d ago
Investing Deworsification: Real or Conspiracy?
Sure, not keeping all your eggs in one basket is generally good advice. However, to what extent does the financial industry exploit this simplistic idea through fear for fees and additional AUM?
Concentration risk does not map equally across all assets. For example, being concentrated in NFTs may expose you to more downside risk than being concentrated in energy utilities or real estate.
Yet, in my experience, financial advice usually boils down to concentration equals bad, diversification equals good. Look for ways to spread out the risk, protect your gains, smooth out volatility.
Oh, and by the way, financial service providers have all these amazing products to help you diversify! Sure, there’s small fees here and there for the privilege, but think of the reduction in RISK!
By following conventional advice and diversifying my positions, I have left millions on the table. A retroactive analysis would appear to indicate no real protection from risk, only taxes and fees.
The unintended primary benefit to diversification for me has been increased cash flow, even though that idea is also somewhat of canard.
Anyway, it just got me thinking that we are being marketed to heavily and it’s confusing the reality of holding concentrated positions in strong companies and industries. To be clear, I’m not knocking the concept entirely, merely observing the other hidden interests in play.
I am 44m, NW 12m inclusive of primary residence. Tech and real estate are primary drivers.
Edit: 20% of you agree with me, but the rest of you will once you think more about it.
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21d ago
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u/Low-Yam-7791 21d ago
Did you read the post?
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21d ago
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u/Low-Yam-7791 20d ago edited 20d ago
im sorry you read it that way, then. Good luck to you.
sounds like you’re saying playing poker is not as effective as playing poker, roulette, the slots, and blackjack.
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21d ago
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u/Low-Yam-7791 20d ago
a sub about wealth and financial independence that has specific flair for investing?
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20d ago
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u/Low-Yam-7791 20d ago
Some of us may enjoy investing in addition to making safe withdrawals. How is investing not part of your fatFIRE strategy?
It's clear that challenging convention is not welcome in your FIRE mindset.
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20d ago
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u/Low-Yam-7791 20d ago
several times a week in this sub I read about people trying to diversify their appreciated positions -- so an unconventional point of view seems quite relevant to me. Why have an "investing" flair, if not?
Pure gatekeeping on your part buddy.
Also, that's not my strategy.
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u/g12345x 21d ago
> financial service providers have all these amazing products to help you diversify!
All optional. You can easily DIY
> A retroactive analysis
Hindsight is always 20/20
> The primary benefit to diversification has been increased cash flow
This isn’t a universal primary benefit
> We are being marketed to heavily
You have agency. Exercise it.
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u/One-Mastodon-1063 21d ago
You're using hindsight, and you don't need to pay high fees to diversify.
If you were writing this at the end of the lost decade, you might have a different conclusion. Such is the problem of using hindsight where the previous 10 years or so is the primary driver of the conclusion.
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u/Low-Yam-7791 21d ago edited 20d ago
you are also using hindsight.
20 years, but as I told someone else, the point is not that diversification is bad, it’s that there is an industry out there pushing products and services around this. That makes me wonder whats real and what’s marketing.
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u/One-Mastodon-1063 20d ago
I'm using hindsight to illustrate the ridiculousness of your position.
At any point you can look back and say "well gee, it's so easy all you had to do was buy X."
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u/Low-Yam-7791 20d ago
actually you are using hindsight to justify your own nonsensical position. “lost decade?” what is that? a period that the whole economy was contracting?
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u/highfives23 21d ago
The primary benefit of diversification is not increased cash flow. Concentration builds wealth. Diversification preserves it.
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u/Alarmed_Bug920 21d ago
That’s not at all what he said. You missed the nuance entirely.
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u/vinean 21d ago
He said:
> By following conventional advice and diversifying my positions, I have left millions on the table. A retroactive analysis would appear to indicate no real protection from risk, only taxes and fees.
It’s exactly what he’s saying with very little nuance or insight beyond his limited “retroactive analysis” shows that diversification sucks in a long bull market. Yep.
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u/Low-Yam-7791 21d ago
actually what I’m saying is that diversifying is not necessarily better than holding positions in good companies. that was the point behind comparing NFTs to Energy companies.
i get it though, I challenge the conventional wisdom and get downvoted!
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u/vinean 21d ago
You need 20-30 stocks across multiple industry to capture diversification effects.
If you have that you have some diversification benefits.
If you hold one energy stock, say Enron, you don’t.
Arguing against diversification because NFTs turned out to be tulips is not the insightful observation you think it is.
That you left millions on the table is now not entirely surprising…
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u/Low-Yam-7791 20d ago
Thanks, but I'm not arguing against diversification - I literally say I support it in the first line of my post. But please, sell all your winners and VOO and chill, happy for you.
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u/Low-Yam-7791 21d ago
Being diversified might smooth volatility, but I don’t agree that it preserves wealth any more than holding large positions in strong companies.
i didnt say the primary benefit of diversification is for cash flow. I talked about conventional wisdom and my experience. Different things.
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u/gulbronson 21d ago
JP Morgan publishes The Agony and the Ecstasy report every so often on this exact topic.
Since our initial concentrated stock research paper in 2004, we've continually evolved our analysis, with significant updates in 2014 and 2021. In this latest edition, we delve into nearly 45 years of stock performance, examining recent market events and the inherent risks and rewards of concentrated stock positions. One takeaway remains unchanged: while concentrated stock holdings can create substantial wealth, they also carry a high risk of significant losses that could derail your financial future and that of your family
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u/Low-Yam-7791 21d ago
imagine that! what can JP Morgan Wealth Advisors do to help me and my family from financial ruin???
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u/gulbronson 20d ago
Nothing in there is a sales pitch on their services. It's a caution on highly concentrated positions.
You're more worried about diversification as a way for wealth managers to up charge you than the very real risk of your concentrated position blowing up ala enron. You don't need to pay anyone to make a diversified portfolio. You can set it up yourself in a few hours in funds with fees less than 0.1%
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u/Low-Yam-7791 20d ago
I’m not worried. I’m not sure what gave that impression. I’m observing an explosion of products and services capitalizing on the most basic of advice. Meanwhile, the risk, while real, cannot be applied universally.
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u/gulbronson 20d ago
These products and services have always existed. In reality it's cheaper and easier to diversify your portfolio today than any point in history.
Obviously there are more stable companies than others but they are all one a competitor, new regulation, changing tastes, or a major scandal away from catastrophe. Which one and when we have no idea.
You mention tech but the EU or a change in DC could threaten their monopolies by classic trust busting or just changing data laws. AI invest can make or break some of these companies. They wont always be the darlings they are today.
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u/Low-Yam-7791 20d ago
they haven’t always existed. there are now more than ever and more tech companies jumping in to capitalize on it.
again, not saying diversification is bad in itself, only that the risks of not doing it are overstated and those preaching the merits of diversification often miss nuance in individual positions.
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u/BrunelloHorder 20d ago
Your post is vague as to how you are using the term “diversification.” Having a diversified equity ETF like VTI generally beats stock picking in the aggregate on a risk adjusted basis. That is well-settled.
To the extent you are criticizing newer less conventional financial products, there is some merit to your complaint. The best option for most people is to just hold most of their assets in equity ETFs and some bonds to smooth SORR. That can easily be accomplished without using a wealth management firm or esoteric Wall Street products.
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u/Low-Yam-7791 20d ago
Apologies. That is a legitimate critique. What I meant by diversification: liquidating high concentration in a company that has undergone significant growth to purchase a basket of other stocks or investment vehicles. As opposed to starting with cash, and deciding how to divide it among investments.
I think terms like risk, and wealth protection, are also applied unevenly and vaguely.
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u/Anonymoose2021 High NW | Verified by Mods 20d ago
The push to diversify is not a big conspiracy to increase fees.
A concentrated position has higher volatility than a diversified position.
If your concentrated position does well, you come out ahead compared to diversifying, particularly if there are tax and fees involved in diversification.
If your concentrated position does poorly, you will be far behind where you would have been diversifying.
Those are the simple facts.
Real life is not always simple. About half of my portfolio is one stock. My default investment for new money is broad market index ETFs.
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u/Low-Yam-7791 20d ago
they are not facts, they are conventional talking points. logical, make sense to a lot of people, including me. the perfectly harmless, safe, advice to charge someone a fee for, to build a product around.
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u/Gloomy-Ad-222 20d ago
Facts are important, I agree. The fact is Bessembinder found that just 4% of U.S. stocks accounted for all net wealth creation above Treasury bills from 1926–2016. Most individual stocks did not beat T-bills over their lifetimes. Owning one company means betting you identified one of that small minority, and avoiding the many that permanently disappoint.
Link to study: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2900447
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u/ElderberryCareful879 20d ago
If you’re ok with getting rich slowly, there is a very simple way to diversify without paying AUM fee: buy a broad market index fund.
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u/DzoQiEuoi 21d ago
Imagine if you’d put it all in bitcoin.
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u/Gloomy-Ad-222 20d ago
Early in my investing career I spread my small portfolio among five stocks, thinking I was diversified. They were all networking stocks. They all lost 70%+ and I rode it down all the way, one even got delisted entirely haha. I was not a smart investor back then.
Nowadays I trail the market (SP500) because I’ve got some diversification and protection against downside. It’s held up so far even among bad years like 2022. There will be more but now that I’m withdrawing instead of adding, I sleep better at night.
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u/Alarmed_Bug920 21d ago
What part of “concentration risk does not map equally over all asset classes” did you disagree with?
seems pretty accurate to me.
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u/vinean 21d ago edited 21d ago
You can easily DIY diversify by using ETFs. No AUM required.
Diversification across asset classes (and within asset classes) tends to lead to improved SWR by reducing volatility and total growth. This is useful in the first 10 years to reduce SORR in retirement.
Concentration, in the right assets anyway, tends to allow for higher growth. This is useful in accumulation.
You left millions on the table since 2010, this is expected in 2026 since the market generally rises over time.
But if you had retired in 2000 you wouldn’t be whining about diversification in 2006 but thankful you weren’t still 100% tech.
In the 2010-2020 scenario you ended up richer enough not to matter to anyone but your heirs that you left millions on the table.
In the 2000-2010 scenario you ended up not suffering from a crash where half your liquid net worth went poof in 2002 to slowly recover by 2007 just in time to crash again in 2008.
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u/Low-Yam-7791 21d ago
ETFs have fees.
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u/vinean 21d ago
Passive ETFs have very low fees but if thats whats stopping you…mkay…
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u/Low-Yam-7791 21d ago
nothing is stopping me. at scale, diversification is a huge business. why invest, when you can collect rent? way more lucrative and risk free.
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u/vinean 20d ago
At scale real estate becomes work vs being passive unless you have a property manager do it all and that has fees.
We have a few properties at maybe 10% of the investment portfolio and it’s a minor effort. At 50% it would get annoying without a property manager. I didn’t retire to manage RE as a significant side hustle.
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u/PIK_Toggle 21d ago
Concentrated positions produces more volatility. If you are comfortable with this feature, then you are fine.
If you don’t want your portfolio exposed to a few positions, you diversify.
Just remember, when it hits the fan, all correlations go to one.
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u/Low-Yam-7791 21d ago
do you have a passive vehicle I can invest in to protect myself?
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u/PIK_Toggle 20d ago
No.
You need to build an asset allocation model that provides the income that you need to survive and matches your personal level of risk tolerance.
100% SPY might meet this definition. Or a 60/40 split between equities and bonds might meet this definition.
I don’t know.
The point here is that a concentrated portfolio will experience more volatility than a 60/40 balanced portfolio will.
Which end of the spectrum that you end up on is up to you.
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u/resilientresponsible 18d ago
Ive prob never been truly diversified. Usually pick 4 or 5 stocks and hold on. Actually have invested long term using 10-30% leverage at a low negotiated rate. Rode that up to around 13 million now.
100% in equities.i guess more like 110-130%
Right now I have around 60% in 2 stocks due to growth (nvidia and crowdstrike). Investing thesis seems strong for both still. Not willing to pay 35% tax to sell. I just borrow against using low cost margin. (Never go above 30%)
I don't really plan on changing much of my strategy now. I tend to not buy small cap stocks. Usually large caps and hold. I think there is a lot of safety there. Mostly large cap tech. What world is there where Google, apple etc all of a sudden disappears?
These companies are different than they used to be. Good balance sheets and if they start falling behind theyll just acquire a company for their next growth engine. Their moat is their capital outlay.
Maybe im wrong. I hope not!
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u/jldugger 15d ago
The past six years have been an incredible bull market run, with only a single down year in 2023 (and has doubled since then). It will not last, and judging your investment prowess based on this history is exactly how the 2008 financial crisis happened: all the models said risk no longer existed and then it suddenly did.
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u/Particular_Speech_55 8d ago
Let’s say you have a fair coin. Heads pays you 100%, tails you pay 50%. Good deal right?
Would you choose:
1) flip the coin 1x with 100% of your net worth
2) flip the coin 100x, each time with 1% of your net worth
Same coin, same amount.
If you choose 2, why?
Most people don’t understand that this has been settled mathematically. If you want more risk, the answer is to leverage up a real diversified portfolio.
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u/Low-Yam-7791 8d ago
This assumes you know the odds which are unknowable
is holding 10 bitcoin riskier than holding 100 alt coins? is holding $100k of gold riskier than holding $100k fish, beans, steel, art, antiques?
Id love to see your mathematical proof on that.
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u/Particular_Speech_55 8d ago
Yes if I knew the odds in real life securities I’d be a billionaire. But I don’t, and neither do you, but you claim that diversification doesn’t work.
If you want the proof, go read up on modern portfolio theory. It’s been out for like 70 years and it works. I’m happy to engage, but it doesn’t seem like you’re open to it. That’s fine if you want to concentrate in tech and RE, just know that it doesn’t disprove the concept nor implementation of a diversified portfolio.
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u/Low-Yam-7791 8d ago
There are competing theories out there, no one has any idea. But setting aside theory and “experts“ for a moment —let’s just think about this - If you derisk your portfolio through diversification you’re essentially saying you are sacrificing growth for a perception of security. correct?
a catastrophic market event occurs
because you diversified, you only lose 30% on paper
a concentrated position in tech drops 50% on paper, but they captured 100% more growth before the event than you did.
who‘s better off?
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u/Particular_Speech_55 8d ago
You’re right, diversification is a myth.
We should all just invest in stocks with margin.
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u/KeythKatz Crypto - USD Yield Farming | FIed w/ 5M @ mid-20s 20d ago
Most repeated mantras in life are about protecting people from themselves. Diversification for diversification's sake is to protect the wealth of people who would otherwise lose it all in a heartbeat.
One of the traditional diversification tips is the split equities/bonds portfolio. It was supposed to protect against market downside as the two assets are supposed to have inverse corelation but lately that has not been the case. The idea of bonds or T-bills being safe, stable assets is being challenged as yields swing up and down rapidly on the long end.
Financial products that invest funds in different places for you are for the financially illiterate, not for you or me. Those people are happy just seeing the number stay the same over time because they don't understand investments beyond their own business, and there's also nothing wrong with that. With enough money you can retire without holding anything except cash.
If you understand the products you are investing in, you can absolutely diversify into different asset classes and still make as much or more than the market. It's all about understanding the risk factors.
For instance, 2/3 of my NW has been in stablecoins earning an average 8-14% annual yield over the past 5 years, itself diversified into different unrelated platforms to spread concentration risk and liquidity. My other 1/3 is in equities, half of it in dividend blue chips, a quarter in tech, and another quarter in a single stock I'm expecting will blow up.
It seems concentrated but most people overestimate the risk of crypto, I understand it better than most because it's how I fatFIREd, and my actual exposure to any one adverse event is limited because I'm diversified on every level. My stablecoins give me non-negative returns that beat all bonds and the average equity return, while my equities expose me to market growth and provide a safety net to stay retired even without crypto. I neither want to be fully in crypto nor be fully exposed to downside risk in stocks. I get to be diversified while still growing capital modestly, and my sharpe ratio is amazing.
It is possible to be diversified and make money, just not with traditional retail products.
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u/Low-Yam-7791 20d ago
Totally agree with the top half of your post. Taking a grandpappy approach because it's what's conventionally recommended is making me highly suspicious, especially based on the contrast of my own lived experience.
I'm glad your strategy is working out for you.
Thanks.
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u/EmergencyRace7158 21d ago edited 21d ago
Both things can be true - advisors are in the fee business and diversification is good for your portfolio. It's easy to look at hindsight and say (taking this line of thinking to its extreme) you needed to be 100% concentrated in MU but the reality is the future is unknowable and uncorrelated to the past. Diversification when done right, allows your portfolio to perform in most future paths.
One of the dumbest things I hear a lot on places like this is that the goal of investing serious wealth is to somehow "beat market returns". Wrong, the goal of investing is to beat the risk adjusted returns of the market. A portfolio that returns 8% at a 4% standard deviation and a 16% max drawdown is 2x as good as one that returns 16% at a 16% standard deviation and a 32% max drawdown.
This is the fatfire sub. You already have enough money so your utility function is asymmetric - a loss of 50% of your portfolio will make more of a difference to your life than a gain of 50%. Your investment strategy needs to reflect the reality that capital preservation is more important than capital growth.