Diversification in Investment

Diversification in investments:

      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 on 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.

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 infact signals that it should be avoided with use of intelligent.

Also Robert Kiyosaki, who became widely known I 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 preachings 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 commont investor and those who want to remain contended below average returns. But for thos 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 operat 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!)

We will later on go into detail to tell different types of diversification.

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