I have often heard Investment advisers saying that you must diversify your portfolio. The logic is very simple- don’t put all your eggs in one basket. If you have invested in say real estate, gold, shares and art, if one category fared badly, another would fare well and thus your risk is mitigated. Your average returns will be healthy; this is what they say.
Well for an average investor who does not do much research before investing, probably this might be good advice. Such an investor only invests money while investing; he does not invest time. I have seen investors in stock market who own more than 100 scrips; their logic is diversification. In fact, they are the guys who should not be buying stocks directly because they do not understand the market. They feel that they can cover their risk by blindly investing in all the stocks that are recommended by different experts. At least some of them will click and give them the satisfaction of a winner. The question is what about the losers? Well, they believe that they have not suffered a loss until they have sold their shares. So they will proudly tell stories about their winners and the losers are not losers – they are investments for the long term! Dude, who are you trying to fool?
Diversification, most of the times, is an excuse for not doing enough research about the long term prospects. Diversification turns into diworsification in such cases. If one studies the really successful investors in history, they are the guys who have focused on specific sectors. They have invested time to understand certain opportunities and based on years of very close observation, they have honed their skills and developed insights into specific sectors. Having gained insights, they have focused their investment in these areas and have earned huge returns. Yes, they can go wrong also. So they will follow certain hedging tactics based on certain carefully researched methodology, not a blind spreading of their investment based on fear.
Mutual fund concept by itself is a diversified portfolio. I have seen “investors” investing in equity schemes of 20 different mutual funds based on the logic of diversification. I have never seen such “investors” making money because they don’t invest to win. Their prime motive is to avoid defeat; hence they never win in the game of investment.
So what should you do when you are starting your journey on the road of Investment?
My first advice, before investing your money, invests your time to learn more about various investment avenues. In the meanwhile consolidate your investments/ savings by investing in a few Mutual Funds (a balanced fund is advisable – maximum 3 to 5 folios). I am a great believer in consolidation. One must be able to count his investments on his fingertips (thumbs excluded!). So maximum 8 avenues at any point of time is a general advice I will give to all investors. If you want to violate this rule, then 9 is fine- the “Navaratnas” in your life must be enough diversification in your portfolio. If you exceed this limit, then maybe you are not confident about your investments-you need to do more homework!
So are you investing time (remember ROTI) to become a better Investor? Please share your stories.
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