Lets us first ask the question: Why do investors choose to diversify their portfolios instead of just relying on one stock? The answer: To mitigate the risk(s) associated with investing.
Let’s first cover the financial basics and then move on to it’s female applications. As I have outlined before; all financial concepts can be applied to male-female relations. You will see.
The total risk of a portfolio can be summed up with this formula:
[Total Risk = Systematic Risk + Unsystematic Risk]
Systematic Risk is systematic, as the name implies. It means that all of your stocks will be affected by this risk. Examples include inflation, economic stall, etc. There is not much an investor can do about this risk, it is just part of the investing game.
The Unsystematic Risk component is one that only applies to certain stocks within your portfolio. That is to say, what may affect one stock may not affect others. Example of unsystematic risk include a shortage of steel (if in the steel industry), the death of the CEO of that company, internal fraud. As you can see, a shortage of steel would not necessarily have a ripple effect on pencil-making industry.
Now, as you could probably guess, the combination of these two risks can really fuck up your investment(s). But, my friends, there is a way to almost completely cut out unsystematic risk… We call it: Diversification.
For example: Let’s say that you invested $100 into stock A. (100%)
Let’s also say that I invested $50 in stock A and $50 into stock B. (50%,50%)
If the economy slowed, thus decreasing our investments by 5%, you would lose $5 ($100 X 5%) and I would lose $5 ($50 X 5% + $50 X 5%).
This is systematic risk…It can’t be reduced by diversifying…so in this case; we both get screwed out of a Lincoln-spot.
In comes the second form of risk:
Let’s say the chief accountant of the stock A company gets caught for embezzlement, bangin’ the secretary, public urination, etc. (Anything, use your imagination). So the big name accountant gets fired and this is public knowledge. Because of this, the market decides the stock price will fall by another 5%. This is an example of unsystematic risk as it only applies to company A and not to company B (Company B’s accountant is squeaky clean).
So now, having lost the same amount in the prior example, we begin to calculate what else we have to lose.
You now have $95 (See above) and will lose another 5% ($95 X 5%) = $4.75
You now have $90.25
BUT BECAUSE I DIVERSIFIED MY PORTFOLIO: I will lose less than you….sucker. Let us calculate:
I have $95 (like you had) but it is spread out between 2 stocks (A and B).
I have $47.50 in each stock due to my recent $5.00 systematic loss, I took a $2.50 hit in both A and B.
But now, check this out.
A = $47.50 X -5% = $2.38 (loss)…stock A is now worth $45.12
B= $47.50 X (no loss) = $47.50
Chance’s total = $92.62
Your total = $90.25
as you can see, I lost less than you did, simply by diversifying. You may think $2.37 is not a lot of money, and it’s not. But even though I can buy (2) more McDoubles than you can, lets look at this on a macro-level.
Imagine if this had been the case but spread out over 50 different stocks! Or what if our initial cash investment had been higher?! Yes, you would lose more than I simply due to the diversification factor and reducing the impact on my portfolio caused by unsystematic risk.
Okay fellas, now that you know the effect diversification has on your stock returns, how does it affect your ROB (Return on Bitches)?
Assume that you are dating 1 girl and that I am dating 2 (This is a low-ball figure but for simplicity’s sake =P ).
We will refer to them as girl A (Amy) and girl B (Bridgette). Once again, we will assume that both of our A girls are almost exactly alike in nature.
Now, friday night is comin’ up and it’s time to start scheming. We first must assess the overall systematic risk of the market (the game). It is finals week, a dreadful time, and the girls we are dating all have finals…Oh shoot, studying all weekend and no room for Chance =( … This is systematic as it applies to all girls in question and there is simply nothing we can do about it… Doesn’t matter how good-looking you are, how much money you have, or how large your Schlong Johnson may be, it will not change the date of finals week.
Now, lets say it’s the week after. Their schedules are WIDEEEE OPENNNN! Therefore, systematic risk is close to nothing. We must now examine the unsystematic risk involved as well in order to calculate the total risk of not getting laid this Friday.
Girl A (talking about both of our identical girls) is experiencing a flow that happens monthly…Oh christ. You may not want to go there and chances are she doesn’t want you to go there either. So pal, you may go out for a nice supper, a couple drinks, followed by dancing; only to find out that….Oh shit! It won’t be happening.
I, on the other hand, know that it is that time of month for girl A, so what do I do? I reach into my diverse portfolio (Note: 2 isn’t diverse but we’re being simple here) and dial-up girl B! We get dinner and go dancing, have some drinks, and BOOM! I win again 😀
This, my friends, this is Diversification and how you can use it to your advantage.
P.S. I will post later on how to know beforehand if it is or is not that time of month for her. That is an explicit assumption that I have used in this post. But let us walk before we run.