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Highlights from this episode include:

  • 2 types of diversification and how not understanding them can kill your portfolio (2:29)
  • Why holding lots of mutual funds in a retirement account makes it impossible to track your results (5:43)
  • How to diversify your portfolio by holding fewer assets (10:47)
  • The “sector rotation” method for maximizing your investment returns (13:23)

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Read Full Transcript

Do you hate the thought of working past 55 or 60? Do you hate not being able to live the life you deserve today? Do you hate not knowing what your financial future looks like? It's time to stop doing what you hate, here's your host, Mr. Harold Green.

(00:19): Oh, well, hi everybody. This is Harold Green and it is time to stop doing what you hate. How's everybody doing today? Today is a Monday for me. I had a pretty decent weekend this weekend to the couple of days off, just to try and recharge my batteries were coming up on the end of the year. And I can't believe how fast this year has gone by. I mean, even with all of the different challenges that we're facing and you know, the stress of it, all things are, things are moving along at a pretty decent pace. And I'll tell you, next thing you know, we look up the year 2020 is going to be gone, and we're all just going to be sitting here wondering like, Oh my God, like this went by so fast. And so today show I want to get into is titled, is diversification killing your performance or is diversification killing your portfolios?

(01:15): And that's something I've kind kinda been thinking about, you know, how I wanted to present this and how I, how I wanted to talk about this. And I want to just kind of dive right into it and just kind of give you guys an idea of, you know, what I've seen in the past. And, you know, what's been going on with people and some of the adjustments we've, you know, we've had to make and then how I actually manage my clients' holdings. And it's basically according to our rapid retire program and which there can be no guarantees made that you will be in a position to retire seven to 10 years sooner than you normally would. And then we're going to get into investments. And so all investments, including real estate are speculative in nature and involves substantial risk of loss. We encourage our investors to invest carefully on.

(02:02): I also encourage you guys to go out and get your own professional opinion in regards to what it is that you are doing. So you guys ready? All right. One, two, three less good at so there's different types of diversification and there's diversification amongst assets, and then there's diversification amongst asset classes. And so I'll give you an example of an asset class, real estate, for example. And one of the things that I do see when I run into real estate investors, they have their real estate portfolio set up pretty decently for a particular purpose. And so they normally don't own say all condos or all townhomes are all single family homes. They have a lot of different types of properties inside of their portfolio. And then they're, they're diversifying amongst a class of assets and, you know, getting into say, if you own all apartments right now, and what's going on today is the fact that a lot of people can't pay them rent.

(03:17): I just just saw something about a, I think it was the state of New York city itself. I had an eye, a vacancy rate of like 6% or something like that. I don't know too much about New York. I don't know if that's good or bad, but I think it's probably not good that New York was a once most desirable places to live. You know, my daughter, or was ranting and raving about New York city and how great the city was and different things like that. And of course that was all pre COVID, but they're, they're fleeing that state and going to other places, but I digress. And so going back into diversification, amongst assets, that would be, you know, say you own real estate, you own stocks, you own life insurance, you own a business, you may own collectibles. Those are different things of that nature. And so you're diversifying amongst assets and then owning multiple what types of, you know, real estate would be diversifying amongst asset classes.

(04:16): And so one of the biggest things I see, see that hurts people in their portfolios as something I called over diversity, it means that they have way too many holdings in their portfolio. The whole they're holding like tons of different things. And so one of the, he says, I see this as when they have mutual funds. And a lot of times in your, in your forum, one Ks, I see people holding maybe 10 mutual funds inside the 401k because that's all they can hold. But when you break down these 401ks or you break down these mutual funds, you can do a little research on those. You'll find that a mutual fund ones tend to hold 2240 stocks inside of that mutual fund. So yeah, break that down. If you're holding say seven different mutual funds and they all have the maximum of 40 holdings inside, then you're looking at about 280 individual stocks.

(05:18): Now at that, yes, a lot of stocks to be holding in a portfolio. I've seen that done before. I've done that a long, you know, quite a, quite a bit ago, just for diversification sake, but it was a, it was a little bit of a bad move. And I quickly caught that and I saw how spreading the assets or too many stocks is a very bad idea. So what you really want is you don't want diversification just for the sake of having so many different stocks in your portfolio. You want to diversify or into a particular risk tolerance or a, a, I guess, a risk strategy for me. I use a software called I think it's a Riskalyze. And what Riskalyze does is it shows me how to, or it shows me a particular risk number based on the holdings inside that portfolio. And so my strategy is to generate the most return I possibly can with the least amount of risk, but this year, because of coronavirus, a lot of that has gone out of the window.

(06:26): And I'm kind of while I was flying the plane manually and not having it on cruise control when we're in a good economy or the market is say it doesn't have a lot of volatility in it, then you can kind of put the portfolios on autopilot and then you can diversify amongst a smaller group of stocks or whatnot. And your portfolio, I would say maybe 50 to 60, depending on what your targets are and what you are attempting to do, but having way too many stocks in the portfolio really just waters down the performance. And so what we've had to do here lately was start to narrow the portfolios down, say maybe from a hundred, 150 down to like say maybe 70 or so. And so that way we don't get into that situation of over diversification. And none of the reason why I see people over diversifying is because they're in some sort of buy and hold strategy where they're not checking the portfolios on a regular basis.

(07:24): They're just kind of setting them there and then riding the waves of the ups and the downs in the market, because they know over a long period of time, the portfolios will be okay. The question is, is if you were to rotate those portfolios, would you have done better in the long term versus sitting in the buy and hold position? And that just kind of depends on, you know, what stock you're actually holding, but I normally don't see clients holding two or three stocks in their portfolio, like for example, an Apple and Amazon or Tesla, which have done phenomenally well over the last 10 years. And it just kind of ha they've smoked any type of mutual fund or any type of fund out there that you can get your hands on. And that's basically what I call like say focused, focused, focused investing. And so that's where you kind of narrow down your portfolio and you only hold a handful of stocks in there.

(08:17): Then again, that's kind of like a buy and hold strategy too. And so that's something that we can kind of talk about if you're looking to say, maybe get more performance out of your portfolio is to say, maybe narrow down the focus, going back to the 401k. If you are a younger person and you have a longer period of time, then I would probably encourage you to narrow down the holdings in your 401k to like say maybe one or two and not just like have 10 in there because they just kind of doesn't make sense in the Purim. The performance of a lot of these things have been so bad and you want to pick the ones that are performing well and just kind of load up all your, your chips there. But I say that, and you would have to do that based on your investment strategy.

(09:05): So one key takeaway here for the mutual funds is you want to try to check you, meet you, I'm sorry, your mutual funds, and try to figure out like how many holdings are in there. And then I would also say not yeah, to buy too many mutual funds that are investing in kind of like the same thing, like say technology or healthcare. You know, I want to just like buy one or two mutual funds and not like several different mutual funds. And you don't try to diversify if you're doing it on your own and you really don't have time to look at it. I would probably just tell you, look at buying a handful of stocks and it also depends on your time and frame as well. So I want to get into a little bit of, of what I do with my clients or whatnot and how we are investing according to the rapid retire program.

(09:52): So I have about maybe 15 models aggressive growth blend, one aggressive growth blend, two consumer discretionary blend, consumer technology, high growth, large cap, 10 large-cap specialty blend, then moderate income. And so when I'm building out the portfolios, what I'm doing as I'm mixing up the different holdings or the different models and to these so-called allocations, I'll give you guys an example of my longterm ultra portfolio. There is a basically aggressive growth at 20% consumer discretionary at 10 technologies, 35 high value growth at 10 large cap, 10 at 10% large cap specialty blend at 10 moderate income at five. And so what it does is it gets me like where I want to be in regards to how many stocks I'm holding in that portfolio. And then also what the the potential returns are. And so I'm looking for basically 15 to 20% and the longterm ultra portfolio.

(10:56): And I do my best not to hold more than 10 to 15 stocks in any one particular portfolio I'm so that I'm not over diversifying, these are folios. And the next thing I want to get into something called sector rotation. And so you guys can find more on sector rotation out there at Investipedia. A sector rotation is the movement of money invested in stocks for one industry to another as investors and traders anticipate the next stage of the economic cycle. So I sector rotated probably about two or three times this year. The first one was right, like when Corona virus hit and things just dropped through the floor. A lot of the portfolios did lose some money, but I, I rotated not necessary barely into a lot of different sectors. I more started hedging with cash and different things of that nature to bring down the, and the portfolios I loaded up on treasury ETFs, you know, corporate bond, ETF, different things like that.

(12:00): And I was like my first sector rotation, then I think it was around March or so. We looked at the high value growth, which for me was like the cruise stocks and things of that nature. So I was in those for a while. And then in June I rotated to technology cause I figured may or June, I figured that that's where everything was going to be. And then we just, you know, had some phenomenal growth there. And then just recently I did another rotation back towards more of the Dow Jones, industrial average stocks some blue chip stuff or whatnot. I'm sorry, mid-cap stuff. And so for me, I do rotate inside of these portfolios. And so it has served me well, especially when volatility has been on the rise and then we have this election thing coming up here. And so I'm, it's just definitely causing a lot more, I would say what's the word diligence.

(12:56): I would say more watching things, being more hands on, being a little bit more proactive as, as best possible. But again, in investing one of the things we definitely want to make sure we're not doing is we want to make sure that we are not holding too many stocks in our portfolios. We want to make sure that we are focusing in and our, and our sectors and making sure that we are properly rotating when we need to. And I'll tell you if this is something that you feel that you don't have time bore, but you want the best performance you can possibly get for the least amount of risk. I want you to do me a favor and go to my website, retire now, retire wild.com. Download the rapid retired brochure, fill out the game changer form of just shoot me an email at harold.Green@brightfg.com or just give me a phone call (808) 521-4401.

(13:51): And we can set up a time to talk and then start to review your portfolios to make sure, you know, you're aligned the right way with your goals. And I know it's something that I can definitely help with. I know we're going to have to build a long term financial plan to make sure that you are investing the right way. And in order to meet all of the, all of your goals and things of that nature. I also want to take a look to make sure you're not over diversified when it comes to your asset classes. I've seen people come in with three or four or five different bank accounts. It's the same thing with credit cards. People are over diversified, they got like 20 different credit cards. And so I think it's just time to narrow this stuff down and then ride the horse that's going to win.

(14:36): That's all I can tell you is, you know, hook your wagon to the horses that are winning. And right now it's really easy to pick or to look and see who the winners are and who the losers are. And then just, just hookup and hang on for the ride, because it's going to a very interesting ride. And so thanks for allowing me to share with you guys or today's show titled you know, is over diversification, killing or portfolio. And so, and so next time you folks, I want you to stay safe. One, two, three less, get it.

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