Don't put all your eggs in a thousand baskets

By Don Eberley


Diversification is a protection against ignorance. It makes very little sense
for those who know what they are doing.

-Warren Buffett


One of the big differences between successful investors and the rest - apart from the gleaming Bentley in the driveway of course - is concentration.

Rich folks, you see, often concentrate their money on a few stocks rather than diversifying across hundreds of them. But this doesn't mean taking big risks. To the contrary; it means being more discriminating in how their money is managed.

Good diversification is a mutual fund which owns a handful of select companies - as few as 10 or 20 - from different industries. The fund managers act as prudent business owners rather than stock traders, getting to know each company intimately with the goal of owning it for at least one full economic cycle (typically 3-5 years). This is the essence of good investing.

Bad diversification, or diworsification, is a mutual fund which holds 200, 300 or even 400 stocks and trades them frequently based on short-term price forecasts. To own several mutual funds like this is to literally spread your money over a thousand companies or more, and to be constantly replacing them. This is not investing. It is throwing mud at the wall in the hope that some of it will stick.

Do you own too many mutual funds? Do your mutual funds own too many stocks? Visit www.sedar.com to see the full list of holdings in each fund's annual report. If the list is shockingly long, you might benefit from some prudently-concentrated alternatives, and fewer of them. Have a professional assessment done. It might not get you a Bentley, but it is a step in the right direction.

DE