While we’re all enjoying the bull market, let’s also remember that return ‘of’ capital is more important than return ‘on’ capital.
In stock market it always pays to stay sane & make rational decisions.
Diversifying your portfolio is one of the rational decisions.
People who misquote Warren Buffet on diversification themselves don’t know how well diversified portfolio, both, Buffet & Munger have built over Berkshire Hathaway.
Peter Lynch, the unbeatable fund manager at Fidelity Investments, who delivered positive returns for over a decade irrespective of market conditions; also was used to 1000+ stocks in portfolio.
Now I’m not saying buy every other company out there.
Golden rule of portfolio diversification is to own that many stocks which you can track. Simple.
Concentrated portfolios may deliver one of the highest returns, though the risk of blowing is quite high.
I usually have a well diversified portfolio. Right now there are approx 35+ companies in my portfolio (This number more or less keeps changing as per market conditions).
God forbid, if anything goes wrong with 1-2 of these companies (as it usually does in stock market), the remaining 33-34 companies will shoulder the entire portfolio.
Compare that to a concentrated portfolio with only 5 stocks, a blow up in a company or two can seriously dent the portfolio even in a good market.
It’s always better to hedge.
Diversifying my portfolio is one of those hedge I use along with keeping some cash as well as gold in portfolio.
Always remember, to build sustainable wealth, Return Of Capital is important.
