Tuesday, February 27

The Importance of Diversification

Today's stock market tumble (due to China's bigger stock market tumble) reminds me that there is a reason we don't put all our eggs in one basket...

I was actually feeling very smug about my investment accounts. They have been going up, up, up and I figured I was poised to show another very strong month at the end of February. Well, not as much any more.

My assets as of yesterday were broken down roughly as follows (of course, this doesn't add up due to rounding):

  • house: 53%
  • stock market (mutual funds): 31%
  • cash: 9%
  • other real estate/mortgage holdings: 2%
  • business receivables: 4%
  • car/pianos: 2%
Based on this, a 2% correction has a 0.62% impact on my assets. Of course, my house has a mortgage and my investments are not leveraged, so my stock market position is actually around 37% of my net worth and a 2% correction would impact at 0.74% overall. But either way, it is a lot less than the full 2% thanks to diversification.

So today will be a hit, but not a crippling one. Now with a substantial cash position, I am also well positioned to take advantage of a buying opportunity, if I knew how to recognize one. :)

Today's billable hours: 5.5
Today's contracted hours: 1.0

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