Saw this article, “To Diversify or Not to Diversify” on the Canadian Capitalist’s blog and at Consumerism Commentary. Kiyosaki seems to recommend not diversifying (for “any investor who wants to be a rich investor”) yet he keeps reminding us that “to become a professional investor, the price of entry is focused dedication, time, and study” and that finding the best investments (focusing) means “sifting through hundreds of offers, studying, analyzing, and determining the pros and cons of each.” He is correct. For me to not diversify my portfolio, I would have to devote my entire day (and life) to investing.
And finally he says one of the reasons “the rich get richer is because they are focusing, while the middle class is diversifying.” He fails to mention the possibility that the rich are getting richer because they have access to far better (and more costly) financial advice than the rest of us, and access to far more capital which gives them access to far more investment and speculation opportunities. And he fails to mention getting better financial advice as an alternative to diversifying. Instead, he tells us blindly focus our investments rather than diversifying, because after all “people like Warren Buffett, Oprah Winfrey, or Lance Armstrong, they have all focused intensely in order to win.” He also fails to mention that some of the rich have probably become poorer because they are focusing.
So what’s the point of the article? I think it’s that you should quit your day job, and start “focusing on finding the best investments” so that you can be the next Warren Buffett. Or “if you choose to remain an amateur — a passive investor — then, by all means, diversify.” Well folks there’s no shame in being an amateur or a passive, defensive investor. In fact you will probably have far better success if you pursue this path. Benjamin Graham explained the dangers of trying too hard so well in the first chapter of the Intelligent Investor:
A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom. If you merely try to bring just a little extra knowledge and cleverness to bear upon your investment program, instead of realizing a little better than normal results, you may well find that you have done worse.
Since anyone–by just buying and holding a representative list–can equal the performance of the market averages, it would seem a comparatively simple matter to “beat the averages”; but as a matter of fact the proportion of smart people who try this and fail is surprisingly large. Even the majority of the investment funds, with all their experienced personnel, have not performed so well over the years as has the general market. [italics his]
One more fact about Warren Buffett. He is not just a successful investor, but he is a very successful businessman also. He is on many boards and is able to influence the direction of his investment. (e.g. shooting down Coca-Cola buying Quaker).
For most investors, not diversifying is just plain stupid. We all know what happened to investors who focussed on technology!
Another fact about Warren Buffet (I didn’t know that before, read it in “Bull!”, excellent book about bull period of 1982-2000): during bear market of 60s and 70s he timed the market – which is “no-no” for diversified portfolio.
I’ve also read that article and thought Kiyosaki had given bad advice. The title to the article is really bad. He should have called it focusing on your investment efforts. He did not talk about the risks of not diversifying. Even though you pick investments that you think are the “best investments”, when you are wrong, let’s not hope you have all your money in that investment. People make mistakes, no matter how smart they are. It’s minimizing the mistakes that is important.
Overdiversifying is also bad. Diversifying works up to a point, then there’s diminishing returns on each investment until there is no extra benefit on each additional investment.
Loi, I agree overdiversifying is a bad and it is a trap many people fall into. I wrote about it in a past article, “Owning too many mutual funds a bad idea.”