What's your idea of diversification

[dardhel]

Agreed, if you are starting out with a long time horizon, stocks are the way to go. From there branch out... Become a homeowner, pad your emergency fund, get into bonds, commodities, etc. There are countless ways to go...

[poundwise]

"Wide diversification is only required when investors do not understand what they are doing." ~ Warren Buffet

[Broken Arrow]

"Wide diversification is only required when investors do not understand what they are doing." ~ Warren Buffet

I agree, although the quote does require some context. Few investors, even professionals, are on the same level as Warren Buffett. It's not so much that he's a a demigod that can do no wrong, but I think many detractors do overestimate their own abilities relative to his.

To paraphrase his own words, 99.99% of all investors should just go ahead and exercise extreme diversification. He has also mentioned that index funds are a good vehicle for such portfolios.

However, for those who are willing to take it to the next level, then yes, he believes that diversification is a horrible idea. Ok fine, but this is Warren Buffet talking, and I'll not make the mistake of overestimating (nor underestimating) my own investing abilities relative to his. Simply put, I am not Warren Buffett.

But that's OK. Warren Buffett has also said that everybody is different, and as such, our investment strategies should reflect that accordingly as well. For example, I am not in my 70's, have billions of liquid capital, being something of a genius, and have a company filled with talented minds working on valuations for me. Even he has said that if he was younger and had less capital, he would not have invested the same way as he does now. Like personal financing, investing isn't one-size-fits-all, and for me to try to imitate him would be financial suicide.

And that's something that has always kind of bothered me. We make all sorts of hoopla about what he and others like him buy and sell. We see all sorts of "expert opinions" go into why that's such a great idea or bad idea. I also can't blame Warren Buffet for taking advantage of the situation with sound bites that may help pump up his buys. But the bottom line is, why would you want to learn more about another man's fish, when you should be focusing on how he is able to fish so well?

For myself, I believe that... roughly 90% of my portfolio should still sit in a basket of well-diversified funds, managed by a brokerage. However, I think I am comfortable (or cocky) enough to start managing up to 10% of my own money by myself. In time, and if all goes well, I will gradually dial up the allocation to my own investments while gradually dial down the need for standard investment strategies that call for extreme diversification.

[poundwise]

"It's hard to drink too much water. There's something called water intoxication, but only the occasional marathoner or idiot succumbs to it. That's why 'drink more water' is the favorite tip of nearly every fitness adviser. Most people benefit, and no one gets hurt. Financial pundits dispense a similar piece of safe, watery advice to nearly all investors: Buy plenty of stocks instead of just a handful. You can't be too diversified, right? ... Few investors argue with the idea that diversification reduces risk. More should."

(SmartMoney, When Less Is More by Jack Hough, complete article)