How Diversification Affects Your Portfolio

Have you ever heard a success guru (or two) say something like:

"The more opportunity you have, the higher your odds of success are."

This "more the merrier" mentality seems logical, especially since it maps to one of the most prevalent investment concepts in existence; diversification.

Diversification as an investment concept is built on the premise that if you spread your capital around among various assets, you'll do fine (on average).

But let's think about something...

What happens when you diversify your portfolio with either (a) assets that are failing to at least perform in-line with their peers and/or (b) assets that are failing to outperform other assets?

How Asset Diversification Affects Returns

At any given moment, you can look at any basket of stocks and see that there are leaders and laggards.

By simply investing into that "diversified" basket (which is exactly what the pervasive indexing strategy is), you are investing into stocks that will outperform their peers, and some that will underperform their peers.

This is exactly why index fund investors think 10% /year is great, instead of 50%.

So, here's a question:

Why intentionally invest in a basket of stocks that we know contains underperformers?

This is where mindset and scrutiny comes in, because we either think that we have to invest this way (because that's what they teach in college or a guru book), or someone told us that a scrutiny-based method is either impossible or too difficult to employ.

And the end result? Missing out on MILLIONS in extra gains.

Here's just one quick example of what $10,000 would be worth in a "diversified" portfolio versus a "scrutinized" portfolio:

DIVERSIFIED: This is a diversified portfolio that uses the index method.

Wealthfront's annual returns since inception (8.0 risk, taxable portfolio, as of 5/28/2021): 9.45%

$10,000 @ 9.45% @ 30 years is: $150,131

SCRUTINIZED: This is a scrutinized portfolio that selectively chooses stocks.

ARK Innovation ETF's annual returns for the last 5 years (as of 5/28/2021): 46.83%

$10,000 @ 46.83% @ 30 years is: $1,010, 285 (a full $800,000 difference!)

So with just our little $10,000 example, we're missing out on $800,000. Imagine now if you had more than that?

End result? Millions of $$$.

Point is, by not using scrutiny, we could be intentionally cheating ourselves out of millions.

Now at this point you may be thinking, "But J., exactly how do we use scrutiny to generate better investment returns?"

One concept I teach in-depth with my Wealth Mastery clients is called "Relative Strength".

Relative strength just simply means how a particular asset is doing compared to it's peers, and in some cases even to other asset classes.

The way this process works is you're basically weeding-out underperformers just like a company does; if they don't perform, you let them go. You do this by comparing performance throughout various different time periods.

We have our own set of special recipes of time periods that we analyze in my private equity fund that we call "Momentus". We've spent years developing it, and we even offer some of these recipes to our clients for free.

Relative strength is so powerful because if you have an underperforming asset for an extended period of time, your not just missing-out on gains; you're wasting time - and that's the most valuable factor of all with investing! does diversification affect your portfolio?

At this point, I think we can both agree, A LOT.


J. Patrick

Would you like me to build you a personalized rapid wealth blueprint, for free? If that even remotely interests you, go here to get the details.

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