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Portfolio Theory
According to Investopedia, Portfolio Theory (MPT):
(MPT) is a theory on how risk-averse investors can construct portfolios to optimize or maximize expected return based on a given level of market risk, emphasizing that risk is an inherent part of higher reward. According to the theory, it's possible to construct an "efficient frontier" of optimal portfolios offering the maximum possible expected return for a given level of risk.
Modern portfolio theory argues that an investment's risk and return characteristics should not be viewed alone but should be evaluated by how the investment affects the overall portfolio's risk and return. MPT shows that an investor can construct a portfolio of multiple assets that will maximize returns for a given level of risk. Likewise, given a desired level of expected return, an investor can construct a portfolio with the lowest possible risk. Based on statistical measures such as variance and correlation, an individual investment's return is less important than how the investment behaves in the context of the entire portfolio.
MPT assumes that investors are risk-averse, meaning they prefer a less risky portfolio to a riskier one for a given level of return. This implies than an investor will take on more risk only if he or she is expecting more reward. (CLICK HERE)
Holding dozens or more sector specific stocks defeats the purpose of MPT and in fact increases your risk of holding one that goes south while simultaneously ensuring your dollar holdings in any ones that spike is less. Therefore, there must be a sound reason as to why we are seeing more and more self-identified investors declaring on social media and bulletin boards their breadth of cannabis holdings. Yes, always be skeptical of using forums (bulletin boards) and platforms (social media etc) as reliable sources but they are useful to identify trends. CannaInvestor Magazine is no stranger to this strategy of over diversification and you may recall we referred to this as the shotgun approach. Some refer to this as making as many bets as possible. This approach is also akin to a large spider web where the slightest disturbance in one area results in the spider(s) converging on that spot. Holding many positions with news alerts activated allows an investor to take full advantage when good news comes – move money from other positions and converge. There are also the transaction costs for selling and buying to consider as well as the cost of dead money sitting as you wait for good news – capital gains, foreign currency transactions, etc.