To diversify, or NOT to diversify in investing?

[Dennis Ng]

On Thursday (12 April 2007), I conducted a full-day "Financial Awareness Workshop" for SAFPSC for MINDEF staff.

At the workshop, I shared about the benefits of diversification. One attendee quoted Warren Buffett that "Diversification is a protection against ignorance."

Many people would then think Warren Buffett advocates putting all eggs into one basket. My simple questions to these people are:

1. firstly, are you as knowledgeable and experienced about stock investing as Warren Buffett?

2. Does Warren Buffett put all his wealth into 1 single investment? Not that I know of actually.

3. if you put all your eggs into one STOCK and NO matter how closely you watch it, there can still be events beyond your expectations that can lead to you losing your money. eg. frauds. Local examples include CAO, ACCS, Citiraya, Informatics etc, etc.

So would I put all my money into one single stock? My answer is NO.

However, what we should guard against is "over-diversification" or what Peter Lynch said as "di-worsification". To diversify, just investing into 5 to 15 stocks should be more than sufficient.

By doing so, you're still putting all your eggs into one basket, this basket known as stocks. Thus, I personally also invest in other assets (baskets) eg. property, UK Endowment, Land Banking, Gold etc.