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Diversification

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updated 22 Feb 2023

Diversification is the act of owning a broad array of stocks or assets across multiple market sectors to limit downside risk. Diversification has been studied in depth, and the S&P 500, a pool of 500 of the best stocks, has outperformed a majority of professional money managers year in and year out. Diversification, when done properly, is a proven path to safe investing with decent returns. With that said, investors such as Peter Lynch, Warren Buffett, Joel Greenblatt and Charlie Munger, some of the best to ever do it, are strongly against it.

Diversification Quotes from Famous Investors

"Diversification is protection against ignorance. It makes little sense if you know what you are doing." -Warren Buffett That comes with the very clear caveat of "if you know what your doing"

"If you can identify six wonderful businesses, that is all the diversification you need. And you will make a lot of money. And I can guarantee that going into a seventh one instead of putting more money into your first one is gotta be a terrible mistake. Very few people have gotten rich on their seventh best idea. But a lot of people have gotten rich with their best idea. So I would say for anyone working with normal capital who really knows the businesses they have gone into, six is plenty, and I probably have half of what I like best. I don‘t diversify personally." - Warren Buffett

"Two things should be remembered, after purchasing six or eight stocks in different industries, the benefit of adding even more stocks to your portfolio in an effort to decrease risk is small, and overall market risk will not be eliminated merely by adding more stocks to your portfolio." - Joel Greenblatt

"There's no use diversifying into unknown companies just for the sake of diversity." - Peter Lynch

"The whole secret of investment is to find places where it’s safe and wise to non-diversify. It’s just that simple. Diversification is for the know-nothing investor; it’s not for the professional." - Charlie Munger

Video Resources

How Diversification Works

How many stocks should I own?

Warren Buffett, Diversification is a protection against idiots