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The 3 Simple Rules of Investing by George Peacock, Carol Fabbri, Kwok L. Tsui, Michael Edesess

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DEADLY TEMPTATION #4

Sleep Well at Night with Your Risk Under Control

Standard financial advice often includes a few misguided prescriptions that are intended to help control your investment risk. We’ll now explore some of these, and the reasons they’re misguided. We told you that if you hear that you must diversify among many mutual funds or ETFs and asset categories, you should tune it out. Now we will tell you why you should tune it out.

WHAT MODERN PORTFOLIO THEORY ACTUALLY SAYS ABOUT DIVERSIFICATION

The advice to be diversified comes from Nobel laureate Harry Markowitz’s 1952 paper. Markowitz, as we learned in Deadly Temptation #3, showed that if you diversify by buying a lot of stocks instead of only a few, then some of the stocks’ price ...

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