You let the computer pick stocks for you. But not randomly...based on a certain set of conditions (like high yield or low risk, etc.), you’re likely to get a bunch of stocks that share more than just the characteristics of being high yield or low risk. They’ll also likely have other things in common, like being in the same industry or being companies that have similar business profiles or management philosophies.
Attribute bias is the tendency for those auto-selected securities to have more in common than you asked for. Let’s say you decide to use the built-in tool on your trading software that gathers a collection of securities that fit a certain profile you’re interested in (high-earning or stable or low risk, etc.). The bots inside your computer return a whole list that fit the profile to a T. When you go to buy some of those securities, you may be getting more than just a group of stocks that all fit the profile of "stable." You might be getting stable stocks that are all in tech or maybe agriculture or companies that have similar leadership styles.
It isn’t necessarily a bad thing, but it can lead to an un-diversified portfolio.
Related or Semi-related Video
Finance: What does it mean to rebalance ...1 Views
finance a la shmoop what does it mean to rebalance an account alright people
here's your account pretty broad-based equity portfolio and pretty pie chart -
they're nice going there editor's 17% bank and insurance 14%
telecommunications 9% consumer comestibles 6% drugs legal ones 11%
chemicals in commodities 8% transport and whoa 35% tech well just five years
ago Tech was only 15 percent of your portfolio and it performs better than
double the returns of the rest of the market in that time period so Wow what
time is it need a high tech watch to answer no its rebalancing time why well
because you want to just compound at market rates and yes Tech has been
amazing and wonderful and loving but Tech can get crushed in bad times as
well and the huge 37% exposure to it is well keeping you up at night and it's
see it's gotten up 2% there since we started this video it's just too much [girl waking up in bed at night]
risk attributed to one relatively narrow area of the investing economy even [pie with a risk tag on it]
though it touches everything well you're thinking about making tech more
representative of a balanced broad S&P 500 index fund where in that fund it [S&P 500 document]
represents on only say 11 or 12 percent so you sell some Apple you sell some
Google you sell some Amazon Facebook Netflix Microsoft and you buy a [company logos]
smattering of high dividend high yielding defensive stocks like Chevron [military plane flying]
for Dow Chemical and Bank of America it's kind of defensive in practice [company logos]
portfolio managers rebalance their portfolios all the time so they
represent the promise they made to investors when they raise the money in [scale with tech out-weighted by diverse products]
the first place to be a fully diversified fund taking only market risk
in the process and if they still need to do any rebalancing beyond that and well [people doing yoga in park]
then they just enroll in a hot yoga class
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