Don’t put all your eggs in one basket, they say, which is why a lot of investors have a diversified portfolio. But if you look into the portfolio of some of the greatest investors, such as Warren Buffet and George Soros, you’ll see that it’s very concentrated. This leaves you wondering, should you diversify or not?
The answer lies on your risk appetite. According to Mr. Buffet, over-diversification has low risk and low returns. Since he wanted to earn more, he preferred concentration over it instead. But why not learn about the advantages and disadvantages of diversification, so you can make an informed decision regarding your next step?
Pros of Diversification
The idea of putting your money in more than one investment is to ensure that when one goes down, some are still earning. Investing in stocks and real estate, for example, gives you more options when it comes to earning. This limits your exposure to risk.
Preservation of Capital
Diversification makes it easier for you to protect your capital, reducing the possibility of you losing it entirely. If the stock market crashes, you won’t lose all your money if you invested in bonds or real estate.
Cons of Diversification
Can you imagine managing stocks, real estate, ETFs or commodities all at the same time? If you’re no financial guru, you’re going to need a broker and financial adviser to help you work things out.
Let’s take stocks as an example. There are only a few companies that provide quality stocks at a price that has a margin of safety. If you don’t concentrate on just a few stocks, you’ll end up spreading your money over low quality ones.
Like most things in life, investment diversification has its share of pros and cons. This is why you need to analyze a variety of factors, before you decide to put all your eggs, or not, in one basket.