The Fast and the Furious
I am sure you have seen this scenario. A car driving recklessly, way too fast, and weaving in and out of traffic. You think to yourself jokingly, “Wow, they must be in a hurry!” only to pull up next to them at the next red light. This is what I think about when I see someone betting on individual stocks, trying to time the ups and downs in the stock market.
Think about that car like an individual stock investor, waiting for a certain price with a large percentage of their portfolio tied to only a handful of companies. The individual stock investor may time their lane changes perfectly, beat a red light, and get to their destination quickly at times but they also incur much more unnecessary risk than a diversified portfolio. That driver’s additional risks could cause them to not only fall behind in the drive but total their car completely. The opportunity to get a little ahead causes an outsized risk that could cause a much greater loss.
Now think about your car that is driving the speed limit. You may get stopped at a red light or get slowed down by traffic. You may think that traffic is slow. Chances are that the reckless car is also getting stopped at the red light with you, like a market correction, and just because they are weaving in and out of traffic, buying and selling on a volatile stock, doesn’t mean they are advancing faster than you.
Your car that is driving the speed limit is like a diversified portfolio. You may not see the extreme highs that the individual stockholders see, but you most likely won’t experience such extreme lows… like the car you see on the interstate that flew by you only to be pulled over a few miles ahead.
While driving fast and gambling in the stock market can be fun, it is not the safest or most efficient. So, drive the speed and diversify your portfolio.