Diversification vs. concentration

[Mister Imperceptible]

Do you think we should send that to the FBI?

How about the Mises Institute instead?

My friend is heavily concentrated in FAANG stocks. He thinks diversification is for suckers. He’s made a lot of money.....on paper. It will be interesting to see how committed he is to buy and hold. With what’s going on in the markets recently I feel a lot better being “master of my domain” (rental property). If I was all stocks and bonds, I would feel like I was surfboarding on ether.

[7Wannabe5]

Efficient is roughly the opposite of resilient, so to the extent that you trust that the market is efficient, you should also fear that it lacks resilience. OTOH, if you believe that it is resilient, then you will also have to concede that it is not uniformly efficient. IOW, it is irrational to believe that any system contains a good deal of slack and bounce, but is also perfectly machined.

Psychological resilience is related to having an internal locus of control. The same holds true for other systems, and mostly what is being controlled is level of "stocks" as in "stocks and flows." So, "I am ultimately in control of my own level of happiness." is a statement of resilience, and so is "I am ultimately in control of my own level/stock of rare book inventory/assets, EVEN if I can't currently afford to hire enough lawyers to take on J.Bozo when he violates contract."

[prognastat]

Well resiliency frequently relies on redundancy and redundancy is anything but efficient.

[7Wannabe5]

Efficiency, in other words, is not resilient. What makes a system resilient is the presence of unused resources, and these are inefficient, by definition...

Every civilization, as it nears the limits of its resource base, has to deal with the mismatch between habits evolved during times of abundance and the onset of shortages driven by too much exploitation of that abundance. Nearly always, the outcome is a shift towards greater efficiency. Localized governments give way to centralized ones; economies move as far toward mass production as the underlying technology will permit; precise management becomes the order of the day; waste gets cut and so, inevitably, do corners. All this leads to increased efficiency and thus decreased resilience, and sets things up for the statistically inevitable accident that will push things past the limits of civilization's remaining resilience and launch a downward spiral that ends with sheep grazing among ruins.

...It may well turn out that burning through available resources, and then crashing into ruin, is simply the most efficient way for a civilization to end.= Greer- "Green Wizardry"

[Lillailler]

Efficient is roughly the opposite of resilient, so to the extent that you trust that the market is efficient, you should also fear that it lacks resilience.

Well, yes, no. If we're talking about the market being efficient in the 'efficient market hypothesis' sense we are saying that the market efficiently reflects the aggregate opinions of its participants. This type of efficiency does not preclude flexibility, indeed it may well support flexibility, because an efficient market will always be working towards closing the gap between prior expectations and reality as it emerges one day - or one second - at a time.

We might however have concerns that the economy is over-specialised, and since specialisation pulls in the opposite direction to flexibility, it is therefore inflexible. Then again, even if some actors in the economy are inflexible, that doesn't mean the economy itself is: there is a strong tendency for inflexible organisations to be supplanted over time (example: IBM, Univac, Burroughs, Honeywell vs DEC, HP, Data General), so that the economy as a whole can be more flexible than its participants are at any one moment.

[wolf]

In regards of diversification: The Periodic Table of Investments