Should I Diversify My Investment?

Depending on which particular school of thought you belong to, the answer hinges on individual's perception on risks. Most people including savvy investors and financial planners claim you need to diversify to reduce your investment risk. If you don’t, they say, you could lose money. However, investment gurus like Warren Buffett (one of the richest billionaire on planet earth) said that when intelligent investors diversify, they WILL lose money. Therefore, if you can truly recognize a good investment, diversifying is not a good idea.

"We think diversification, as practiced generally, makes very little sense for anyone who knows what they’re doing. Diversification serves as protection against ignorance."
-Warren Buffett, as quoted by Sandman at Berkshire’s 1996 Annual Meeting

Peter Lynch, another investment guru, on the other hand, says that if you are afraid of losing money, then you obviously don’t know what you’re doing. And, if you don’t know what you’re doing– why are you investing in the first place?

"Buying what you know about is a very sophisticated strategy that many professionals have neglected to put into practice."
–Peter Lynch

By this same argument, Warren Buffett reasons that you should wait until you understand and analyze all of the information to make a potential investment. But when you do, you should jump in with both feet.

These sounded complete common sense to me, but however, does everyone has the same acute vision and analytical ability as well as these gurus are? Quite clearly, the answer is no. The probability of making mistakes or misjudgement of a particular asset's potential does even apply to many of the most savvy fund manager or investment gurus out there. While believing in own self does not always equate to correct judgement, this is the reason why we should all diversify in our investment portfolio in order to protect ourselves from the probability of making false judgement.

Putting all your eggs in one basket could potentially backfire, unless you absolutely know what you are doing. However, even so, mistakes, unforeseen or uncontrollable circumstances do happen!

On the other hand, i don't suggest anyone to overstretch the diversification too far until there is absolutely no weightage on any particular assets or investments. It may just shows that there is a genuine lack of confidence in what one is doing or simply, not done enough homework to be self-confident!

What's your view? Do you believe in diversification?

(Certain quotes of this article are extracted from an article posted in this link)