Is diversification hurting you? I was talking to my friend and he told me that the key to his success was focus. He told me that so many people think “oh I have to diversify” and they end up knowing a little about everything but actually nothing about anything.
I know that in the corporate world, I’ve already been exposed to being a web developer, customer support, operations, quality control, engineering, IT management, marketing and sales (yeah I’ve been busy and not to mention that I’m blogging full time now). If I were to just stick with one field right from the beginning, maybe I could claim to be an expert by now. What do you think? Has diversification affect you?
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{ 6 comments… read them below or add one }
For my part my stocks on food and beverages has not been down but my hotels and banking are down completely. Diversification do keeep things up a bit because not all sectors are affected equally by the recession .
Excellent! I was waiting for someone to say this, diversification is a very dangerous thing because I think it is something that is not really well understood by people and they buy all sorts of stuff without realizing the delta of their diversification benefit is much lesser than the risk of – loss of profit.
I agree that not many people are talking about the dangers of diversification. Many of the people I talk to started to diversify when the the downturn hit. As a result, they were “diversified” into 2-3 sectors. The result was a substancial loss. The fact is that there are no get rich quick schemes and it makes sense to invest in some items that will be around in good times and in bad.
A great question – but tricky.
If you are talking about a profession – you will gain greater compensation as your expertise increases – so long as you are in the right profession. This requires keeping your eyes open as our world changes.
In investments, I believe that diversification is important – depending on the investor. If you are a passive investor and your goals are safety and growth, diversification makes sense.
If you are an expert in one particular area -say energy – it may make sense NOT to be diversified.
As with most things, the answer, in my experience, is a function of where you are and who you are.
Concentration makes a lot of sense in your career because it deals with learnable skills. The more time you spend practicing those skills the better you get and more valuable you become- as long as your skills are in demand. If your skills are at risk of becoming obsolete then you should diversify them as well!
Investing does not seem to benefit as much from experience. Most actively managed mutual funds do no beat the market averages in the long term. There are a few legendary investors like Warren Buffet and Peter Lynch who have but they seem to be the exception rather than the rule. If investing was a learnable skill shouldn’t there be many more managers that beat the market? After all fund managers make investment decisions as their full time job, have finance educational backgrounds and staffs to assist them as well.
Diversification lowers returns in exchange for lowering risk. With investments this is a very good thing for almost everyone because individual stocks can be so risky. If you buy the SP500 and hold it for 30 years you are likely to see it grow a factor of ten to twenty (average annual returns of 8-11%). The chance of losing everything is virtually zero. If you invest in a single company you can hit it big- buying Wal-Mart 30 years ago your investment would have gone up by over a factor of 600 (not counting dividends!). However, if you concentrated into Enron or some other company that died you end up with $0. If you can predict the future by all means put everything into one stock, but if you can’t you really should hedge your bets at least somewhat and buy multiple stocks. If you buy several stocks your investment will act much more like an index fund but at a higher cost.
-Rick Francis
Diversification is not hurting,its not harmed me whatsoever,I think rather then called it “expansion rather then ‘to differentiate”stick with what you are expert into ,passion into and from there,start to Expand from the Course of your center interest and keep passion in it to discover the “en-explored Area ‘in your Business Vision movement