Do I need to Diversify?

Do I need diversify?

Diversification is often called worsification. Why? If you don’t know individual stocks you shouldn’t own them and owning many of them is just going to mean you can’t know them all that well. That is where an index fund comes in. The people that select individual securities well should not diversify and those that don’t would only rate to pick more stocks that are not good investments so an index fund provides the needed diversification.

Most people should not own individual stocks and so diversification of a poorly selected group of stocks is poor protection. Most people overestimate what they know, and underestimate what they don’t know.

The best solution is to purchase a broad index fund.

An index fund diversifies for you.

I typically own no more than 10 to 15 individual stocks. I’m comfortable holding 25% of my funds or up to 50% in a single position if the circumstances justify it. Volatility is not risk and if you truly understand a business the risks are mitigated.

Concentrating your portfolio raises your returns

You increase your returns by concentrating your portfolio in your best ideas. This will increase your volatility but if you research positions well and understand them and their business properly and demand a large enough margin of safety you will do well.
Again, you probably shouldn’t own individual stocks.

For the vast majority of people, even highly intelligent they should concentrate their efforts on what they do well and use index funds and the stock market to make their money work for them while they increase the skills of their trade.

Even if you learn how to invest and value companies properly and have the time to invest reading the financial for a ton of lousy companies and a ton of great only to pass on hundreds and hundreds to find a good investment, you still have to avoid psychological biases and stick to your beliefs and know when to buy and know when to sell.

Read some of our free how to invest content catered towards both the retirement centric fund investor and the enterprising investor who wants to select securities.