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I think this issue is like asking if we should go for higher-yielding, more risky investments or lower-yielding but safer investments. For people who have the time and the risk appetite to do so (able to afford some large losses at times), being able to concentrate your resources onto the few companies that you have identified as out performers in the long run, due to their low price, good growth prospects, etc, while in this case, diversifying may dilute the returns of your outperformers with those of the underperformers.
“Keep all your eggs in one basket, but watch that basket closely.” - Warren Buffett
One of the downsides of this is seen in the quote, keeping all of our eggs in one basket will need your time and effort to watch that basket very closely. Another one of the down sides is the extra risk you incur. It's more risky to have all of your assets in bonds than a mix of bonds and equities (there's a certain point where the risk is the lowest).
Diversifying our portfolios into different types of investments (think equities, government & corporate bonds), different countries and different industries will help spread out our risk and reduce our exposure to the risk of any one corporation or type of security. This also requires less time as we can choose funds, I personally like index funds as shares in Thoughts on Indexing, to help invest our money into selected companies, increasing our exposure while not requiring the large initial capital to spread across the different companies and investments.
And so that's how I led to my final conclusion that it is better for people who have more time and a bigger risk appetite to buy individual companies while others who may be more strapped for time should try and diversify our holdings
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One of the downsides of this is seen in the quote, keeping all of our eggs in one basket will need your time and effort to watch that basket very closely. Another one of the down sides is the extra risk you incur. It's more risky to have all of your assets in bonds than a mix of bonds and equities (there's a certain point where the risk is the lowest).
Diversifying our portfolios into different types of investments (think equities, government & corporate bonds), different countries and different industries will help spread out our risk and reduce our exposure to the risk of any one corporation or type of security. This also requires less time as we can choose funds, I personally like index funds as shares in Thoughts on Indexing, to help invest our money into selected companies, increasing our exposure while not requiring the large initial capital to spread across the different companies and investments.
And so that's how I led to my final conclusion that it is better for people who have more time and a bigger risk appetite to buy individual companies while others who may be more strapped for time should try and diversify our holdings
If you have enjoyed this post and would like to receive notifications on new posts, you can subscribe to my blog via email or like our Facebook page
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