Most of us are self-directed investors, for good or ill — you’re probably here because you like researching or trading stocks, and I obviously feel the same. But should we be trusting ourselves to manage our money?
I know that sounds like a fatuous question — obviously, we should trust ourselves much more than we trust a broker who’s trying to pitch us a stock, or a mutual fund manager who ramps up the fees and just tries to mimic the S&P 500 so he doesn’t get fired. But should we ever let anyone else manage any of our money?
Personally, I love researching stocks and I like to invest in individual stocks. But I know that I’m not the best investor or portfolio manager out there — I am too emotional sometimes, I know that I make mistakes of both omission and commission and stick with stocks that I shouldn’t, or avoid stocks or macro trends that turn out to be great investments. I’m very human, and most of us humans are not good at being consistent and focused about our investing or trading… especially when we get to see the movement of our stocks up and down every day as we sit there with the subconscious desire to do something to prove how smart we are (writing about my investments as much as I do probably makes me a worse investor in many ways).
So I diversify away from myself.
Some people don’t have to do this, and I know what Warren Buffett says about diversification (“Diversification is protection against ignorance, it makes little sense for those who know what they’re doing.”) I, unfortunately, am not Warren Buffett — so I diversify, in part, to protect my portfolio from myself.
I do that in a few different ways — individual stocks do make up more than half of my portfolio, and I try to be diverse in the stocks I own and keep weightings low and buy and sell in chunks and nibbles (my stomach would do flips if I maxed out at much more than 10% of my equity portfolio in a single stock, for example, and I rarely have holdings that exceed 5%).
More importantly, I have a decent chunk of my retirement savings and investment portfolio that is effectively tied to the S&P 500 or similar indices, at ...