The Benefits of Diversification

Diversification BenefitsBenefits of diversification.pdf

“Cast your bread upon the waters, for you will find it after many days.  Give a portion to seven, or even to eight, for you know not what disaster may happen on earth.”

King Solomon, Ecclesiastes 11:1-2, English Standard Version

                It’s been said that diversification is the only free lunch on Wall Street.  Everyone, from investment professionals to lay people, knows that diversification is prudent and is investment best-practice.  On the other hand, there are some people who have ignored the principle of diversification and done extremely well.  There are some advantages to concentration instead of diversification.  First, extreme positive results are more likely with concentration.  Often, people who are very successful became so by doing one thing very well.  They started a company, or went all-in on one stock that worked out, or only invested in real estate (with leverage).   Second, concentration leaves an investor with less to understand.  Owning one stock or a piece of real estate is easier to get one’s head around than a globally diversified portfolio made up of many asset types.  Finally, there could be lower costs to just owning a small number of investments, with no need to rebalance the portfolio.  Do these arguments refute the common wisdom?  Was the wisest and wealthiest man who ever lived misguided on his approach to diversification?  Let’s take a look at the benefits of diversification.

Read the full Educational Spotlight: Benefits of diversification.pdf