Spreading Yourself Too Thin

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by Gavin in Blog, Credit Spreads
April 22, 2013 4 comments

Diversification is a fools game. I’d rather risk my entire account on one trade.

Before you start thinking I’ve gone crazy, hear me out. Warren Buffet once famously said:

Wide diversification is only required when investors do not understand what they are doing

I remember doing a coaching call with a client one time and towards the end, he said, “Sorry mate, I gotta go, I have about 50 bull put spreads to close out before expiry.”

I couldn’t believe it. When I asked him why he had so many trades on, his answer was – diversification. To which I replied, “but during a market meltdown, correlation will go to 1 and you will be madly trying to unwind 50 trades.”

His reply, “Oh yeah, I guess I hadn’t thought of it like that.”

Personally, I much prefer to have one trade, on an index, and watch it like a hawk. I’ll adjust it when necessary and that is all I need to worry about. If you think about it, it’s actually much less stressful that way.

So, what do you think? Are you spreading yourself too thin (pardon the pun) with your trading?

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  1. Jim says:

    I agree with your post, if you are an active trader. I’ve found that if I diversify too much my attention becomes scattered among too many trades. Some trades then don’t receive the attention or active management they might need, because I’m busy watching other positions. It feels a bit more daunting to have a large amount of capital in a single position, diversity feels safer. However I now prefer to trade with on 1 or 2 larger positions, and give them my full attention!

  2. Gavin says:

    I agree Jim, nice comment!

  3. David Loosemore says:

    I’d rather have two or three complementary strategies that hedge each other to some extent and may have some different expiration periods. This reduces the level of draw downs over the year. But it’s a good point not to have too many trades on too many underlyings on at once.

    1. Gavin says:

      Agree completely.

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