There are at least a couple of pitfalls to be diversified or over diversified (depending on one's perception). The risk of inadequately following a particular stock (too little weighting, failure to understand company, etc.) and the risk of becoming sloppy about a particular stock that moves significantly (As: It's only such a small part ($) of the portfolio so so-what if it drops 50%).
I want to reiterate though,
1)It is only received wisdom that the larger the number of stocks held, by that fact, the greater one will approach average results. That is not necessarily so, imo. I find it's a function of dollar-weighting within a sector and being in the appropriate sector at all. So, for example, as for oil/gas stocks, I find the important decision is whether and when to be in any or not. Whether a person is in for 1-2 or 15-20 or 20-50 different positions, this is a risk/reward issue. Where for me, I am on the side of having less business risk with individual companies (a risk which occurs with picking just 1-2 companies) which is offset by my not going for the greater or greatest rewards by attempting to define, seek, and pick only 1-2, the "best" opportunity.
2) There's way too much testosterone emphasis about "beating the market". There are studies out that show many/most? individual investors aren't even getting 'average' results long term (Ibbotson 10%/annum average). For somebody old like me, looking back, with perhaps now a more acute sense of compounding, I say somebody who can invest regularly and who can get 10% compounded annually over a few decades -- that person is going to be okay financially at the latter part of the lifestage. I realize of course younger people want it NOW, so view "average" results as unacceptable. Looking back though...a different story. Imo, in my experience. |
