Your Money
You've likely heard the advice to "not put all your eggs in one basket." While diversification makes sense in theory, sticking with it can be emotionally difficult, especially when one investment is soaring and you wish you'd invested more, or when another is lagging and dragging down your overall returns.
Why is diversification so hard to maintain? Three psychological factors are at play:
- Loss aversion: We feel losses about twice as intensely as gains. A $100 loss in one investment can sting more than the satisfaction from a $150 gain somewhere else.
- Fallacy of composition: A sharp drop in even a small position can make us worry about our entire portfolio's safety, even when the actual impact is minimal.
- "If only" thinking: It's tempting to compare our results to whatever performed best last year—but that requires perfect hindsight, which none of us have.
The bottom line? Diversification is mathematically sound, but emotionally challenging. That's why part of my role is not just building your diversified portfolio, but helping you stay the course—especially during those inevitable periods when it doesn't feel like the right strategy.
Diversification Means Always Having To Say You're Sorry
by Brian Portnoy
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