About Diversification And Concentration In Investment
It is literal and clear that diversification
has all to do with reducing risk. You may also want to fancy-name it
‘asset-allocation’. Why would one ‘allocate’ to multiple asset classes or
‘diversify’ if one is safely sure about one asset class, and the return one
would get, one would never think of any sort of allocating or diversification.
Yes it also has to do with the advent of the ‘financial industry’. Recently we
see in Indian markets the launch of, simultaneously, gold etf and hybrid mf
schemes involving equity, debt as well as gold etf investment. Why? They have
launched only now? Wasn’t there as need of ‘gold-touch’ earlier? Or in one year
only gold has become ‘investible’ or worth giving ‘allocation’? Thus most of us
do/or should understand, this is about business and they have to sell financial
products, any for that matter. So, diversification is a superficial concept and
asset allocation is different and more important which itself includes
diversification.
Well, coming to the main topic, lets’ see some
expert thoughts on diversification in investing:
Legendary investor Warren Bufferr has said for
diversification, “Diversification is protection against ignorance; it makes
very little sense if you know what you are doing.”
He also says, “Keep all your eggs…in one basket, but watch
the basket closely” So it is clear and evident that the biggest and
indisputable legendary investor opines that diversification is not a necessary
of investing. And in fact signals that it should be avoided with use of
intelligent.
Also Robert Kiyosaki, who became widely known in
past one last decade for his thoughts and books series Richdad give his thought
on diversification as below,
He says, ‘focus, focus, focus, if you want to be
rich’ ‘Investment in diversified mutual funds, in the long run benefits more to
the mutual fund company than to the investor’ He says, investing into
diversified mutual funds would not get you anywhere, he also gives example of
how mf companies earn more than investors in the long run as said.
While his preaching are mostly contextual to
USA economy and financial markets, his thoughts also apply a greater extent to
whole world scenario.
He repeatedly emphasize that, investing in a
mf can be good for the most common investor and those who want to remain
contended below average returns. But for those who want to ‘play to win’, and
become rich out of investing, diversified mfs are not just the right thing to
go.
(this article is not against diversified
mutual fund schemes or investing into gold etf, but tells facts on
diversification issues, and realities that matter, because mfs invest in
several stocks and diversify that doesn’t mean they remain immune from market
risk. Yes, this diversification makes 100% sure that the returns will remain
average or below average, in a range and still dependent to bull market. They operate
in market and when markets fall ALL mf portfolio takes a beating. Without
exception. So where is the advantage of diversification if you are not protected
with market fall!)
So,
diversification is a superficial concept and asset allocation is different and
more important which itself includes diversification. So when we are aware and
following proper asset-allocation strategy, the word ‘diversification’ should
ring no bell to us.