Monday, 24 November 2008

It is not about diversification

Why diversify your portfolio? Is this the key to investing success?

Diversification provides safety in numbers and avoids the eggs-in-one basket syndrome, so it protects the value of a portfolio.

But the masters of value investing have shown that diversification only serves to dilute returns. If you're doing the value investing thing right, you are picking the right companies at the right price, so there's no need to provide this extra insurance. In fact, over-diversification only serves to dilute returns.

However, perhaps diversification isn't a bad idea until you prove yourself a good value investor. Diversification may suggest 'conservative' style, but diversification per se is not a value investing technique.

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