Read the exerpt below and then answer the questions: The idea behind diversification is that if you spread your investment dollars around to various investments, if one goes down, the others will protect you from losing everything and if you diversify perfectly, the other investments may move in the opposite direction, so that your gains offset your losses. So maybe some of your investments produce positive returns, while others are losing money. But what if a particular stock produces huge gains? Consider Twitter. Its IPO was at the beginning of Nov 2013 and the stock opened at a price of about $42. By the end of the year 2013, the stock was trading at $69 a share. So, if you had $100,000 to invest and you put it all into Twitter at the IPO, your investment was worth about $164,000 at the end of 2013 – a gain of $64,000 in about 2 months! But what if you had diversified and put only $20,000 in Twitter and you invested $80,000 in other stocks? At the end of 2013, your Twitter stock was worth about $33,000 and so you only gained about $13,000 on Twitter, as opposed to $64,000 if you invested all your money in Twitter. Ouch!!!! Questions: 1) What is your opinion? 2) If you had diversified and the one stock made very large gains (Twitter in my example), would you experience FOMO (fear of missing out) because you made $13,000 rather than $64,000? 3) Would you be disagree with an financial person who suggests that diversification is a good thing? Or would you be glad you had diversified anyway, even though, on this particular occasion, you did not make as much money as you would have if all your money was invested in that one stock
Read the exerpt below and then answer the questions:
The idea behind diversification is that if you spread your investment dollars around to various investments, if one goes down, the others will protect you from losing everything and if you diversify perfectly, the other investments may move in the opposite direction, so that your gains offset your losses. So maybe some of your investments produce positive returns, while others are losing money.
But what if a particular stock produces huge gains? Consider Twitter. Its IPO was at the beginning of Nov 2013 and the stock opened at a price of about $42. By the end of the year 2013, the stock was trading at $69 a share. So, if you had $100,000 to invest and you put it all into Twitter at the IPO, your investment was worth about $164,000 at the end of 2013 – a gain of $64,000 in about 2 months! But what if you had diversified and put only $20,000 in Twitter and you invested $80,000 in other stocks? At the end of 2013, your Twitter stock was worth about $33,000 and so you only gained about $13,000 on Twitter, as opposed to $64,000 if you invested all your money in Twitter. Ouch!!!!
Questions:
1) What is your opinion?
2) If you had diversified and the one stock made very large gains (Twitter in my example), would you experience FOMO (fear of missing out) because you made $13,000 rather than $64,000?
3) Would you be disagree with an financial person who suggests that diversification is a good thing? Or would you be glad you had diversified anyway, even though, on this particular occasion, you did not make as much money as you would have if all your money was invested in that one stock?
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