Diversification—“Fidelity’s Buddy”

Over the years I have often quoted Nobel Laureate, Merton Miller, stating that the only thing we know for certain about investing is that “diversification is your buddy,” valuable insight for every investor.  However, diversification can also be used in a manner that can be very harmful to investors.

Last week there was a full-page ad in Bloomberg Businessweek extolling the great long-term performance of their Fidelity Low Priced Stock Fund.  There is no question that an investor in this fund would have done very well.  Hence, Fidelity will invest their advertising dollars to promote the results.

This is where Fidelity’s “diversification strategy” comes into play.  Fidelity manages and offers 185 different funds.  They have funds representing virtually every  “sector” (asset class) of the market.  In other words, they are well diversified with their offerings.  No matter which sector of the market does well, Fidelity has a fund with great performance numbers.

This makes the advertising decisions at Fidelity very simple, “push” the winners.  And, if you have that many funds you will, by definition, have great performing funds to push.  I have to admit it’s a very clever strategy.

It reminds me of the advice I used to give my clients for “cocktail party investment talk.”  When someone starts to boast about owning this or that hot stock, they could always respond with “I own it too.”  Why?  My clients were diversified to the point of owning an interest in virtually every publically traded company around the globe.  All the winners!  (But also, all the losers.  No need to disclose that to anyone.)  So don’t expect Fidelity to spend any advertising dollars pushing their poor performing funds.