One of the lessons we can pick up from dating and bring it over to investing is that diversification is good. You do not want to put your everything in one place. What happens when it all comes tumbling down on you? Diversification is a good way to reduce the risk. When the investments are diversified among various financial instruments, industries, and equities, when disaster strikes, the risks are minimal. It is simply explained in the aphorism; don’t put all your eggs in one basket. It is also one of the techniques that were employed by merchants years ago. The more the boats, the merrier.
It gives one’s portfolio some resilience, an ability to withstand shocks. Bad bets are often hard to predict and a broader portfolio when money is spread around means that you are less vulnerable to the ups and downs of the market. It is also worth mentioning that if you put your eggs in different baskets, then you ought to spread the baskets a little far away enough from each other.
However, there are people who advice against diversification, like Jim Rogers in his book A Gift to My Children: A Father’s Lessons for Life and Investing where he gives an example of Bill Gates. He writes:
Bill Gates didn’t diversify. The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket. You can go broke diversifying.
Even after putting this into consideration, we need to remember two things. Diversification is never about stopping the risk. It is about reducing the risk of adverse market conditions. The main goal is reducing the risk. It is also never about creating the money. It is about preserving the money. So one needs to decide whether they have the courage to face the markets unprotected, or stand shielded behind diversification.
In the end however, it boils down to you- your ultimate responsibility. Practice your due diligence, and stick with it though the haul.