Diversified Portfolios Are Difficult to Maintain

It takes dedication and work to hold a portfolio to it’s initial weights. A number of factors conspire against maintaining a diversified portfolio.

Prices of the securities move such that the percentage allocated to each class/category/sector/style  changes too.

Novice investors are quick to sell stocks that they think are not doing well. They follow trends. They rarely capture what the market has to give. They almost always buy high and sell low.

Market prices are driven by news. Here is an excerpt from Reuters explaining why the market did nothing on Aug 5, 2013:

NEW YORK, Aug 5 (Reuters) – U.S. stocks drifted lower in low volume on Monday, following record closes for the Dow and the S&P 500 last week, as a lack of major news left the market directionless.

News is unpredictable. Novice investors are driven by fear and greed. They overreact to every piece of earth-shaking news. With this mindset there is no way you can maintain the original weightings.

In fact one of the reasons one employs an investment advisor is so that the investment advisor will rebalance the portfolio; i.e. buy and sell securities to maintain the original weightings.

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