I like you to learn how to invest by hearing directly from experts—like Warren Buffett on diversification. These are Warren Buffett’s thoughts on diversification:
If you are not a professional investor; if your goal is not to manage in such a way that you get a significantly better return than the world, then I believe in extreme diversification.
I believe that 98 or 99 percent —maybe more than 99 percent—of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.
All they’re going to do is own a part of America. They’ve made a decision that owning a part of America is worthwhile. I don’t quarrel with that at all. That is the way they should approach it.
Warren Buffett, talking to MBA students.
This video will start playing at the exact spot you need so you can hear Buffett speaking about diversification to some MBA students.
Listen a few minutes and you will understand that the only exceptions are for professionals. Individual stocks, and stock trading, is NOT for ordinary investors who are relying on this money for their retirement.
Also hear Warren Buffett on diversification for professional investors.
However, Warren Buffett also points out that the other 1 percent who are trying to actually beat the market should take the exact opposite strategy. The best professional investors have the access and wherewithal to do know companies inside-out. They can endure the inherent risks. They might even participate in their management strategies. To beat the market they have to concentrate their bets on one, two or three companies.
Ordinary investors do well by avoiding both unnecessary costs and the strong emotional tendency to market timing decisions. Investing in individual stocks (or other speculative investments) is playing a loser’s game.
In conclusion, 99% of people can be winners if they only take appropriate risk, and then broadly diversify using index funds for the lowest possible cost. It’s a buy and hold strategy.
Read more about diversification:
I discuss this in my foundation article: Smart Investing: Ten Simple Rules.
Also, this short video demonstrates that diversification is important in investing because it yields the highest returns per unit of investment risk.
After that, learn more about Warren Buffett on diversification in Larry Swedroe’s book: “Think, Act, and Invest Like Warren Buffett“. It is available on Amazon and a way to support this site.
