Yes, this is a tired, old subject, and I may not have a lot add to it, other than to again emphasize its importance. Diversification is critical for a higher probability of achieving your long-term goals of financial freedom and a prosperous retirement.
But why? “Surely, if I had put all of my money in Amazon.com stock (AMZN) when it first went public, then I would be better off now?” Well, yes, BUT, would you have held it and only it all of these years? Would you, perhaps knowing it was your only holding, have traded it differently and gotten out during a dip in the stock, or a bear market? Can you say for certain that you would have held it throughout, and own it today? No, you can’t.
However, with diversification, you can let individual stocks have room to move a little more, and let an AMZN or a MA play a bit and still hold them today.
Also, what if you had chosen eToys.com instead of AMZN to put all of your money? You would have had to start over.
Finally, you need to remove individual company risk from your portfolio, because, quite simply, losses hurt more than gains. When I ask someone, “If you had a 50% loss and a 50% gain, would you be back to even?” then often say, “Yes, of course.” However, that isn’t true. If you lose half of your money, and make back half of what you then have left, you’re at 75% of your original balance. The same if you have a 50% gain, and then lose half – you’re left with 75%. We need to avoid major losses as much as possible. Diversification helps with this. Often when I hear that the NASDAQ is down half a percent of so, my portfolio is actually up on the day, with consumer products, utilities, drugmakers, financials, etc. being in my portfolio, and more than offsetting the NASDAQ’s loss.
Remember, this isn’t a gamble – you’re not putting it all on red or black at the roulette wheel in Vegas. You’re putting the odds in your favor as much as possible to achieve your dreams. Don’t let the promise of a quick, “sure thing” derail that journey.
DECADES to Wealth 