Saving the Appearances (of Standard Finance)

Unbalanced

Back in the Europe of the Middle Ages there existed a curiously schizophrenic attitude to the question of whether the Earth was at the center of the universe. The doctrine of the established Catholic Church decreed that it was. The practical evidence suggested that it wasn't and the orthodox scientific theory endeavored to fit the evidence to the theory, at the expense of commonsense and logic.

Today there exists a similarly curious attitude to the question of whether or not economics is governed by people making rational decisions in consistent ways. The doctrine of the established economic theory says that it is. The practical evidence suggest that it isn't. And the orthodox economic theories endeavor to fit the evidence to the theory, at the expense of commonsense and logic.

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Diworsification is Good for You

Mythic Investments

We all know that over-diversifying our stock portfolios is bad for our wealth. Even if our main aim is simply to avoid the problems of correlated stocks all falling together it’s well known that you can get most of the benefits of diversification from a portfolio of no more than fifteen companies. Anything else isn’t diversification it’s diworsification: it adds no benefit and costs us more.

Only, like so many well-known truths about stocks, this is a myth. Owning as few as fifteen stocks opens you up to all of the terrible things that happen to investors that take on too much risk. In the worst case everyone loses money and you get a socialist government. How bad is that?

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