Diversity of Portfolio
‘Portfolio Diversity’ means spreading the investment risk by investing in a large number of stocks across various sectors. The concept of diversity stems from the popular adage “It is not advisable to keep all eggs in one basket”. The expectoration is that in a diversified portfolio a majority will produce average results, a small number will result in loss and a few will do extremely well and the final result will be average of this varied performance. Diversified portfolio is recommended for investors who do not know investing.
Safety through diversity comes only from a really large number. Having 20 or even 50 stocks will not produce the required diversity. A portfolio of 500 stocks only will ensure adequate diversity. Since purchasing and keeping track of such a large number of stocks is impossible for an individual investor, leaving investing in an index fund, a mutual fund that tracks a diversified index like ‘S&P BSE 500’ as the only viable option.
Diversity provides safety but does not create real wealth. Master value investors like Charlie Munger prefer highly concentrated portfolios. In fact his portfolio comprises of just four stocks!