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Diversify, Monitor Occasionally, Rebalance If Needed: My Golden Rules of Long-Term Investing

During my college days, while enrolled in a real estate finance class, my professor emphasized a crucial mantra for real estate investors: Location, Location, Location. Drawing a parallel for long-term investors, I believe the essential three words in investing are: Diversification, Diversification, Diversification.


Nick Murray defines the lack of diversification as limiting a portfolio to one idea, influenced by various factors like the internet's growth, Artificial Intelligence, Private Equity/Credit, Digital Currencies, or even during a bear market when investors concentrate their portfolios in cash, anticipating the end of capitalism.


Although not everyone agrees with the concept of diversification, some may be tempted by the latest "fad of the day" and ignore it. Even Andrew Carnegie once believed in putting all eggs in one basket, as seen in his famous quote below:


A picture of Andrew Carnegie with a quote he said

For prudent investors who comprehend math, probability, and market dynamics, broad diversification is the optimal strategy. Hence, my advice today is: Rebalance, Rebalance, Rebalance.


It's essential to be aware that you might own more popular large growth stocks than you realize. Even a typical total market index fund, such as the Vanguard Total Market Index ETF, is significantly overweight in Large Growth, with a 38% exposure, according to Morningstar.


Acknowledging the difficulty in following this advice, especially given the recent impressive performance of large U.S. growth stocks, it's crucial to ask: Is this a bubble? While there are differences between the current situation and the early 2000s tech bubble, the concern lies in the already high prices, despite the companies having great potential.


My golden rules of long-term investing: Review your portfolio, ensure broad diversification, and consider rebalancing to your target allocation if needed. As you consider rebalancing, work with your tax adviser to ensure you understand the tax ramifications.

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