I once had an Economics professor tell me, "The principle behind investing is to keep your risks mitigated while giving yourself the biggest returns."
Sound advice. Simple enough. And I've carried it with me my entire professional life. But is there more to this then meets the eye? Does it pass the whiff test?
Well, I recently posted about the number one factor that effects market returns, asset allocation.
But what mitigates risk for a personal investor?
Simply put, time and diversification. Now time is the easy part. No twenty-year block of time in market history has ever seen a losing outcome. If you wish to extrapolate this to the crypto-verse, go ahead. The blockchain is going nowhere. It's a game changer and here to stay.
So let's expound a bit on diversification. This has been a hot topic the last couple days based on recent posts. Not so much how diversification helps, but how over-diversification harms.
In fact, over-diversification has become such an investors' bugaboo, that Peter Lynch coined the term "DIWORSIFICATION" lamenting the fact that some companies expand into areas widely different from their core business. (See Under Armour or GoPro) This especially applies to personal investors, as most large companies have consortiums of people, a lot smarter then we, acting as safeguards.
For the average investor, the entire free market is at your fingertips. And more often then not, that is a bad thing. I recall an old memo written by ex-Yahoo senior vice president Brad Garlinghouse. It's since been dubbed the “Peanut Butter Manifesto” — leaked to The Wall Street Journal, lamented that the company “lacks a focused, cohesive vision…. I’ve heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular.” This is a shinning example of why personal investors such as WE need to be cognizant of diworsification.
Now with that giant disclaimer behind us, diversification remains the single best way to mitigate your investment risk. Don't believe me? Ask the folks who were all in on Enron or Lehman Brothers. The main mistake I see amateur crypto investors do is simply gobbling up coins like a raccoon in a garbage can, and think they are diversified. That couldn't be further from the truth. To be truly diversified, redundancy is a no-no. A portfolio of 4 coins can be just as diversified (or more) as one with 30 coins. Being spread out across both market cap and industry sectors is crucial.
But how much is too much? That is the golden question. And honestly, this is up to each one of you. It may come down to really how much time you wish to invest in this digital crack habit. If 10 coins exceeds your tolerance of fundamental analysis (FA), then stop there. But wisely choose investments that are spread-out as described above. Even focusing on one industry, but spread across the market cap probably is fine, too.
Personally, my portfolio exceeds 30 coins. But do I feel I've slipped into diworsification? No. Of course I don't. Maybe its my experience as an equity investor that precludes any concern for that. But what I do know, is that my investments are well spread across the crypto landscape. Not done haphazardly, but with much deliberation.
Will it work? I don't know. I've only been in this game for just under a year. I can supply my XIRR at years end, and into the future.....but it's been performing positively thus far.
There will come a time when the law of diminishing returns applies. But personally, I feel that it's not a cliff we all just suddenly jump off of. But it's more a limit of comfort that is to each your own. Once you're outside your comfort level, that's when stupid mistakes happen and diminishing returns occur.
So sleep on that Cryptomanics!! Forever Crypto! Ho out
Thoughts????