Stock portfolio diversification may not be the answer
I read and responded to a post at DINK's personal finance blog which discussed the issue of stock portfolio diversification or focused investing. It was a great post.
Since reading the article I've thought more about this whole notion of portfolio diversification. I was trained to think that stock diversity was almost 'Biblical' and anyone serious about investing would diversify their stock portfolio to somehow 'hedge' their bets. It makes an incredible amount of sense. Invest in stocks where losses can be offset against gains and vice versa and hopefully those gains will outweigh the losses and produce a reward.
One reader recommended the The 15-Stock Diversification Myth presented by Bill Bernstein as the most concise argument for stock portfolio diversification. This stance implied that focused investing was not the best way to manage a portfolio and that diversification was.
I would probably agree with the DINK's. However, in saying that, and as I responded to the post,
For one investor diversification will be the answer while for another focused investing will be what they're looking for.
It all depends upon the amount of risk you are willing to take with your investment.
Myself, I prefer the focused investing model because it's a no-holds-barred method that doesn't take prisoners. After reading some quick comments about the "Graham vs. Buffett" debate I found a comment made by Henry Lu which stated,
But a focused investing approach is not going to work without deep research into business.
Obviously! Diversification is about safety. Focused investing is about knowing what you're doing and why you're doing it and how you're going to do it. You don't have a safety net so you need to make sure your assumptions are right from the start.
It seems like a big gamble but it's an educated gamble.
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