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.
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| Diversity of Stock Portfolio |
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!
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