The Diversification Buzzword




“Don’t put all your eggs in one basket”
Portfolio managers everywhere swear by this age old adage. They will recommend clients to put their investments in different assets. Mentioning words like ‘Diversification’ and ‘Asset allocation’ makes their services look good. After all, the common man is led by herd mentality. It is very easy to convince him that timing the markets is impossible. So what is the result? Most people are stuck at 'Average’ returns. After all what is diversification in the sense these portfolio managers mean? They mean, buy some of this and some of that and a little bit of those. Depending on the age of the clients, they might change the percentages of this, that and those. The final result is balancing the portfolio, which is supposed to give investors average steady returns.

But that is it. There is no technical analysis involved in most of this portfolio management. Little thought is given to the prevailing trends of the investments. It is assumed that come retirement, the investments would have all appreciated and you will be sitting on a nice piece of nest egg. Tell that to those people who neared retirement in the 2001-2005 period. They had seen their portfolios destroyed, no matter how sector diversified they were!

Profitable Candlestick charting is all for diversification. It is an essential component of the trading philosophy. However, there is one key factor in the diversification we believe in. It should be based on technical analysis.

‘If a stock is not going up then why buy it’?

This is a simple yet powerful statement. We urge everyone to diversify in different sectors of the markets, but only when the candlestick signals tell them to. If the retail industry is trending down, then why buy stocks related to it just for the sake of diversification? If there are 20 industries and 18 of them are trending down, why would you want to diversify into more than 2 industries? Let the candlestick signals tell you the correct place to be in. They have worked well for over four centuries. The in-built psychology of the signals will assure that investors are putting their hard earned money in high profit probability situations. That should be how portfolios are managed. Anything average is just that – Average!