-Wayne

There’s also http://www.sharebuilder.com - I don’t know too much about that site, but I believe they allow you to buy shares of shares, which means you can own a bit of Berkshire for, say, $100.

And just a disclaimer - I do not work for, nor am I affiliated in any way with, Berkshire-Hathaway. I just happen to be a big fan of Buffett. :^D

As for Berkshire-Hathaway: yes, I’m with you there. Just the other day I was thinking I’d like to own a piece of them. I know I can’t afford the A shares (or whatever they’re called), but don’t they have a cheaper version? I’ll have to look into it…

True, but as a rule, their exceptional performance has been extremely reliable. As opposed, of course, to the go-go funds of the 1970s (or was it the ’60s?), the best of which produced a 116% annualized profit before going up in flames. My point here is that Berkshire-Hathaway is an exceptional company that’s very well diversified (Coca-Cola, Gillette, GEICO, etc.) and I don’t see any reason not to trust my money to them, instead of going solo and trying to diversify.

By the way, J.D., thank you for commenting back - in my experience, bloggers don’t spend too much time reading their readers’ comments. :]

Warren Buffett is Warren Buffett. You and I are not. Here is what Warren Buffett actually believes about diversification:

If you are not a professional investor, if your goal is not to manage money in such a way that you get a significantly better return than 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.

GL is right that Berkshire-Hathaway has outperformed the market over the past 43 years, but it is the exception and not the rule.

Great analogy!

InvestEveryMonth: did you just equate gambling to investing? A smart investor would do the research, read the annual reports, subscribe to news alerts, etc. On the other hand, the smartest thing you can do when gambling is to try and count cards in blackjack - which, once again, has a scientific, rational and mathematical basis.

J.D.: “And even if she finds some she likes, what are the odds that they’ll produce returns that beat the market in the long-term?” There is an investment fund that has outperformed the market every year for the last 43 years, and its average annual growth is ~22%. That fund is Berkshire Hathaway and the man in charge of it is Warren Buffett, who also happens to be the richest man alive. When he was asked about diversification, he said, “You put all your eggs in one basket. And then you watch that basket!” - and I agree wholeheartedly.

I think that analogy is a little flawed. Diversification isn’t like putting all-stars and crappy players together; it’s more like building a team composed of players with complementary skills. The most successful teams have offensive threats that provide the bulk of the scoring (like high-performing stocks), good ballhandlers that distribute the ball well but don’t score as prolifically (like bonds and mutual funds), and defensive specialists that can keep a game close when the team’s leading scorer is having an off night (like CDs and money market). To be successful in basketball or investing, you’ve got to be solid in multiple facets of the game, instead of relying on just one.

And now I feel silly for sounding like a T. Rowe Price advertisement…

The average investor lacks the time and the inclination to search for quality stocks. And even if she finds some she likes, what are the odds that they’ll produce returns that beat the market in the long-term?

Diversification isn’t just a casual whim. It’s one of the foundational elements of modern portfolio theory. It works.

Diversifying for the sake of diversification just doesn’t make much sense to me.

The smart investors are able to find larger returns because know what they are doing and have calculated the risks in their favor either way.

Diversifycation is for investors that don’t understand the industries they are investing into.

Until you break the $250k barrier in investments, its best to stay in index funds due to the fees. As you get above that mark its good to look into absolute return strategies. Hedge funds, commodities (oil, coffee, orange juice) and REITs (real estate mutual funds).

Once you are looking into 6 figure investing, the fees for many of these investment vehicles become justified, though I still question most hedge funds due to the lack of regulation.

No matter what your nest egg looks like, always rebalance. Good post JD.

Completely agree. Many financial advisers tend to give cookie-cutter-type advice on diversification and asset allocation. But people should be aware of their unique goals and their own risk tolerance and diversify accordingly.

It’s like a basketball coach going, “Ok, I’m going to put my crappy players, mediocre players and my all-stars on the court at once…just so I’m diversified.” Why on earth would an investor do that — it makes more sense to only put your all-stars on the court and only the best companies in your portfolio.

If one doesn’t have the time to do the proper research, studying, etc. to make sure that only the greatest companies are in their portfolio, then buy a low-cost index fund and sit back and relax. Over a long period of time you’ll average about 11% per year, which is what the market does anyway. And it’ll save you a ton of fees/commissions along the way (as opposed to buying several types of asset classes and individual investments in each class).

I praise the guy for trying to educate people, but I think there’s a better way to educate folks.

-Wayne

His book, more than any I have read, hammers on the importance of rebalancing. Without rebalancing, most of the advantages of diversification are not fully realized. No one else gets that point across as well in my opinion.

I’ll look forward to your review of Investing 101, since it appears that Kristof also spends some time on this issue.

I remember though that Robert Kiyosaki has agreed (in principle, as you pointed out) to an interview on your blog. He is, for one, against diversification. He contends that most of the world’s richest people are concentrated, not diversified. I tend to agree with this too, although Warren Buffett is an interesting case study.

I’m certain you have received tons of questions to ask him. Could you add this to the list:

I understand that as a beginner, diversification is my best friend. As I do more research, observe market trends, and generally become a more savvy investor over time, how is my approach towards diversification supposed to evolve?

Thanks. Great post, as usual