Should You Diversify your Investments?

[swill]

Mark Cuban & Kevin O'Leary have shared different perspectives on this in the past.

Having a diversified set of investments allows us to minimize our risk and allows the average investor with limited expertise to make a 7-8% average annual return which will allow them to retire, send their kids to school, and more.

On the other hand, there are plenty of examples where having concentrated investments can lead to larger amounts of wealth and higher potential returns. For example, if you look at many billionaires, you will see the concentration in their wealth Amazon, Tesla, etc. Further, there are enough stories out there of someone using $5k-$10k to invest in a company they believe in and having it triple or quadruple in value in a matter of weeks or months.

In my view, concentration can be a way to amplify returns and grow our wealth at a quicker pace, but it does come with greater risk. Risk that the average investor is incapable and unwilling to bear. In my view the Kevin O'Leary approach is the right one for the grand majority of people.

What do you all think? Comment below.

 

[jimmy2004]

@swill According to Warren Buffet, diversification is a hedge against ignorance. If you’re a professional investor, you dedicate time to analyzing company financials and monitoring your portfolio to make sure that you buy undervalued companies and divest yourself of overvalued companies. That requires a lot of diligence. Diversification will hinder your gains if you are aware of which companies, for example, have a low EV/EBITDA and you don’t concentrate your investment into those.

But most people can’t/won’t do that, so diversification is a safe strategy for them to grow their money with little risk, though with concomitant little returns as well