Is Diversity For Idiots?

5 Replies

Hi BP. I’ve heard different takes on this topic, and I want to hear what the BP community had to say. People like Mark Cuban and other successful entrepreneurs have been heard saying “diversity is for idiots” because you can never know what’s going on with every investment you make. On the other hand, I’ve heard investors like Jim Cramer and many others say that diversity is crucial. What do you think? What are the pros and cons?

I hear about diversity all the time. The pro's tell you to spread out your investment money into both stocks and bonds so you don't lose all your money if the market goes way down. To me, this is a defensive strategy. It minimizes your potential loss. If your close to retirement this isn't a bad idea to look at.

I heard a financial advisor on the radio I listen to talk about how foolish this is. He said you may minimum your loss but your not going to maximize your potential gain if you do this. If you put your money into something that is very diverse and it only makes 10% that just doesn't work for me. It may be very low risk but i would rather take more risk and get 20% or more and let it compound for years especially if I was young. My 401K (for example) is in a high risk mutual fund and I watch it closely. You could say it's diversified because it's made up of many stocks. I would never invest a big chunk of money in a single company stock. Think Enron.

On a broader note, I would look at diversifying my money into different types of investments if you have a chance to. Personally, when I retire I will collect money from my 401K, Roth, Pension, rental property, and SS. Wife also has a pension (teachers retirement) which we're going to move over to an IRA once she retires and her 403B.

@James Gleeson - Diversification is the strategy to maximize your middle of the road outcomes. You’d rather make the S&P average of 7% per year every year over 20-30-100% in one particular stock (Amazon, Apple, who knew that 52 week highs just keep going up?)

Imagine you’re the CEO of Snapchat. One minute you’re worth $5 billion, the next you’re worth $800m. If you’re comfortable with massive swings of wealth, then don’t diversify. A lot of people aren’t comfortable with the swings DOWN and regret being all-in on one basket. That’s why people in winning positions sell to take money off the table, like Bill Gates selling bits of Microsoft. He’d be worth more if he hadn’t.

Great thread idea!

Understanding your goals and what you value are pivotal to answering this question. If your goal is to reach 10 million in net worth no matter what, and you’ll work until age 40 or age 70 to get there, then maximizing your opportunities will be crucial. You won’t get there with index funds. Putting all your eggs into business ownership, whether your own or the business of others, would be the way to go. Hopefully your skill set and talent and grit will get you there at some point.

Most people will value other things rather than leaving a legacy to their heirs. Time off with family, vacations and travel, hobbies, service opportunities or other similar plans come to mind. They are happy to work at their job, want to spend their free time after work doing what they want to do rather than working to increase their wealth. This type of person either doesn’t have the skill set or drive or both to make a non-diversified portfolio work, and therefore should look to diversify.

There is no wrong way to look at it, people just value different things. The question is what type of person are you?

Cheers!

My two:

If you have a lot, diversification makes sense. 

If you don't, diversification will ensure you never have enough to where diversification makes sense. 

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