When it comes to portfolio risk management the term diversification is thrown around a lot. The theory for diversification being that when you have a multitude of different investments some will do well, while others don’t. But with some investors choosing to use hundreds of stocks, specialists believe it can be the wrong strategy.
One specialist that dislikes diversification is Michael-Lee Chin. The Canadian investment billionaire turned $100 million into $400 million and all off of one stock. His theory is that you should only buy companies you know and do away with diversification. He states that ‘it’s impossible to understand 100 companies’ and that investing in too many areas will make things complicated.
But despite him revealing his story a number of times, some people won’t listen. Many managers still choose to invest in hundreds of companies. But many managers fail to beat their benchmark, with a percentage of around only 39% of large-cap managers in Canada beating the 2011 Q1 index.
And Michael-Lee Chin isn’t the only person believing that diversification is the wrong method. Scott Buffet, a legendary investor, believes that if you know what you’re doing, then why investment in areas outside your expertise. Stick to what you know and research efficiently.
So though diversification may work in theory, you have to pick your targets well. Don’t invest in over 100 stocks just to complete the diversification theory and control your portfolio management. Pick your stocks well and then diversify if you need to.
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