“Do not put all your eggs in one basket” is one of the most famous sayings in any investment not just in stocks. This rule has been here for ages that it turned into a common sense rule. However, there was a time where this saying or rule does not exist.
Around the 70’s and 80’s investing in stocks can be very costly that only the affluent and wealth can afford it. The average people could not afford it. That is where mutual funds come in. They allow average people to invest as low as $100, an amount that would not let you buy any stocks.
This is one of the main selling point of mutual funds absinthe other was the diversified setup. With only $100 dollars you can already invest in many companies plus if one goes down your risk is spread out. Sounds like a sales pitch doesn’t it? When you diversify your investment in stocks you are spreading your money to different types of companies.
Some investors think that diversification is a must to the point that they are already spreading their money to companies that they do not really like just for the sake of diversification. The investment becomes overly diluted to the point that the returns are watered down.
We can look at the analogy of putting too much water in ratio of lemons when we make a cool drink. This is basically what mutual funds is. Because there are too much stocks, there is no central point in which the portfolio is really heading. When some of the stocks are up, some then are going down. This means that any upside or positive growth in the fund will happen a slow pace. As long as you understand the sector or company that you are investing it and you have done your proper research and analysis it is not wrong and no one is stopping you to invest most, if not all, of your capital in that. If you have noticed, some of the most successful investors do not do diversification. Some are even against it. In one of his interviews, Mark Cuban, billionaire entrepreneur, said “All that asset management, diversification, that’s for idiots. You can’t diversify enough to know what you’re doing.”
Other successful investors like Bill Gates, Warren Buffett, and Micheal Dell are also not diversifying most of their investments. Their extreme wealth is the result of holding a stock, primarily in one company.