Elearnmarkets - Financial Market Learning
  • Categories
    • Basic Finance
    • Derivatives
    • Financial Planning
    • Fundamental Analysis
    • Technical Analysis
    • Marketshala
    • Miscellaneous
  • Language
    • English
    • Hindi
    • Bengali
No Result
View All Result
  • Courses
  • Webinars
  • Learn On Elearnmarkets
Elearnmarkets - Learn Stock Market, trading, investing for Free
  • Categories
    • Basic Finance
    • Derivatives
    • Financial Planning
    • Fundamental Analysis
    • Technical Analysis
    • Marketshala
    • Miscellaneous
  • Language
    • English
    • Hindi
    • Bengali
No Result
View All Result
  • Courses
  • Webinars
  • Learn On Elearnmarkets
Elearnmarkets - Learn Stock Market, trading, investing for Free
No Result
View All Result
Home Fundamental Analysis
Diversification- Both in personal and professional life 1

Diversification- Both in personal and professional life

Elearnmarkets by Elearnmarkets
June 17, 2022
in Fundamental Analysis
Reading Time: 7 mins read
0
643
VIEWS
Share on FacebookShare on TwitterShare on WhatsApp

Listen to this:

How many children do you have?  Do you believe in having one or two children or having a bunch of kids thus following the Indian legacy?

There are a number of factors involved in this matter namely education, psychological factor, family pressure etc. No one is wrong or right in this regard and everyone has their own judgment.

The same logic applies to investing as well and here comes the concept of Diversification.

Peter Lynch who said, “Owning stock is like having children, don’t get involved with more than you can handle”.

What Is Diversification?

Diversification implies that instead of putting all your funds in a single security, you should segregate them into a number of securities in order to reduce risk.

Join TMP Join TMP Join TMP

Learn to become your own portfolio manager in just 2 hours by Market Experts

Even if one or two of the company goes bankrupt, your portfolio as a whole is not greatly affected. There is a saying- “Never put all your eggs in one basket”.

But there is a very big problem which many of us actually struggles with i.e. how many stocks should we include in our portfolio?

So shall we go for portfolio diversification ( i.e. eggs in many baskets) or concentrating( i.e. eggs in very few baskets) ?

Diversification-Both in personal and professional life

There is a term called unsystematic risk in portfolio management which says that diversification reduces unsystematic risk.

But there is a limit until which it reduces risk and thereafter it becomes constant.

Every person has their own way of thinking and it differs widely.

Benjamin Graham, father of Value Investing believed to have ten to  thirty stocks in your portfolio, who in his book ‘Intelligent Investor’ wrote,

“There should be adequate though not excessive diversification. This might mean a minimum of ten different issues and a maximum of about thirty”.

Harry Markowitz, a renowned economist of 1950s supported Graham’s view and believed it to be a bad idea to put all the funds in just a few stocks rather should diversify across a large number of stocks.

He said, “Diversification is both observed and sensible; a rule of behaviour which does not imply the superiority of diversification must be rejected both as a hypothesis and as a maxim”

On the other hand, investors like Buffett, Fisher, Keynes etc. believed to have limited the holding to fewer stocks.

The idea of holding and focusing on just a few investments was learned by Buffett from Philip Fisher.

Fisher believed that it was a mistake to teach investors that putting their eggs in several baskets reduces risk.

The main problem in purchasing a large number of stocks might make it impossible to watch closely all the eggs in all the baskets.

Fisher said, “ buying shares in a company without taking the time to develop a thorough understanding of the business was far riskier than having limited diversification”.

Warren Buffett said,

“If you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you.

It is apt simply to hurt your results and increase your risk. I cannot understand why an investor of that sort elects to put money into a business that is his 20th favourite rather than simply adding that money to his top choices -the businesses he understands best and that present the least risk, along with the greatest profit potential.

In the words of the prophet Mae West: “Too much of a good thing can be wonderful”.

In 1934,

John Maynard Keynes said,

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes.

It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.

One’s knowledge and experience are definitely limited and there are seldom more than two or three enterprises at any given time in which I personally feel entitled to put full confidence”

Last but not the least,

Seth Klarman said,

“Even relatively safe investments entail some probability, however small, of downside risk. The deleterious effects of such improbable events can best be mitigated through prudent diversification.

The number of securities that should be owned to reduce portfolio risk to an acceptable level is not great; as few as ten to fifteen different holdings usually suffice.

My view is that an investor is better off knowing a lot about a few investments than knowing only a little about each of a great many holdings. One’s very best ideas are likely to generate higher returns for a given level of risk than one’s hundredth or the thousandth best idea.”

Bottomline:

The problem with most of the investors is that in the name of diversification, they put little money in hundreds of stocks knowing nothing about the majority of them which is nothing but speculation.

They do it on the belief that some out of them might work and fetch good return for them but actually, it reduces the return to a great extent than putting money in well-researched stocks.

It is said that- “Too much of anything is bad”, so how investing be an exception to that.

Lastly, diversification or concentration depends on one’s ability and mentality.

You see most of us have a concentrated portfolio when it comes to real estate or bullion.

One has to first identify his style and based on that he should decide. We have so many great personalities, each having their own style which worked for them.

An investor can use their words as a reference but should try to understand himself and come out with his own style.

Tags: asset classhow to investinvestment basicsinvestment strategyportfolio diversification
ShareTweetSend
Previous Post

Option Trading Tips – Educate yourself to conquer the markets

Next Post

Market resumes Rally, Nifty 1 point shy of 7900

Elearnmarkets

Elearnmarkets

Elearnmarkets (ELM) is a complete financial market portal where the market experts have taken the onus to spread financial education. ELM constantly experiments with new education methodologies and technologies to make financial education effective, affordable and accessible to all. You can connect with us on Twitter @elearnmarkets.

Related Posts

3 Important Factors to Consider when picking the right Penny Stocks for Investing 2
Basic Finance

3 Important Factors to Consider when picking the right Penny Stocks for Investing

October 13, 2022
11.7k
9 Important Things to Consider in Quarterly Results Before Investing in Stocks 3
Fundamental Analysis

9 Important Things to Consider in Quarterly Results Before Investing in Stocks

October 25, 2022
6.6k
cash flow analysis
Fundamental Analysis

5 Ratios for Cash Flow Analysis

August 11, 2022
13.8k
turnover ratio
Fundamental Analysis

6 Turnover ratios for Checking the Company’s Efficiency in Generating Sales

August 11, 2022
8.7k

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Follow Us

Facebook-f Twitter Instagram Linkedin-in Youtube Telegram

Register on Elearnmarkets

Continue your financial learning by creating your own account on Elearnmarkets.com

Register Free Account

Download App

Categories

  • Basic Finance
  • Derivatives
  • Financial Planning
  • Fundamental Analysis
  • Technical Analysis
  • Marketshala
  • Miscellaneous

Popular On Elearnmarkets

  • Market Superheroes:
  • Vivek Bajaj
  • Chetan Panchamia
  • Ashish Kyal
  • Premal Parekh
  • Abhijit Paul
  • Jegan
  • Sivakumar Jayachadran
  • Vishal Malkan
  • Jyoti Budhia
  • Vivek Gadodia
  • Vishal Mehta
  • Piyush Chaudhry
  • Santosh Pasi
  • Gomathi Shankar
  • Market Superheroes:
  • Vivek Bajaj
  • Chetan Panchamia
  • Ashish Kyal
  • Premal Parekh
  • Abhijit Paul
  • Jegan
  • Sivakumar Jayachadran
  • Vishal Malkan
  • Jyoti Budhia
  • Vivek Gadodia
  • Vishal Mehta
  • Piyush Chaudhry
  • Santosh Pasi
  • Gomathi Shankar
  • Courses:​
  • Options Trading
  • Dow Theory
  • Momentum Trading
  • Stock Investing
  • Stock Market for Beginners
  • Harmonic Chart Patterns
  • Algo Trading
  • Elliot Wave Theory
  • Advanced Excel
  • Cryptocurrency
  • NSE Certification Course
  • Courses:​
  • Options Trading
  • Dow Theory
  • Momentum Trading
  • Stock Investing
  • Stock Market for Beginners
  • Harmonic Chart Patterns
  • Algo Trading
  • Elliot Wave Theory
  • Advanced Excel
  • Cryptocurrency
  • NSE Certification Course
  • Webinars:
  • Bank Nifty Scalping
  • Intraday Trading Strategies
  • Options Trading Strategies
  • Options selling
  • Price Action
  • Relative Strength
  • Tax Planning
  • Options Buying
  • Growth Stocks
  • Portfolio Management
  • Relative Strength Index
  • Risk Management
  • Renko Charts
  • Crude Oil
  • Traders Psychology
  • Moving Average
  • Multibagger Stocks
  • Webinars:
  • Bank Nifty Scalping
  • Intraday Trading Strategies
  • Options Trading Strategies
  • Options selling
  • Price Action
  • Relative Strength
  • Tax Planning
  • Options Buying
  • Growth Stocks
  • Portfolio Management
  • Relative Strength Index
  • Risk Management
  • Renko Charts
  • Crude Oil
  • Traders Psychology
  • Moving Average
  • Multibagger Stocks
  • Free Learning Modules:
  • Intraday Trading
  • Options Scalping
  • Swing Trading
  • Financial Modelling
  • RSI Indicator
  • Bollinger Bands
  • Pricing of Futures
  • Personal Finance
  • Initial Public Offerings (IPO)
  • Value Investing
  • Technical Indicators
  • Candlesticks
  • Chart Patterns
  • Option Greeks
  • ELSS Funds
  • Banking and Insurance
  • Real Estate
  • Gold
  • Free Learning Modules:
  • Intraday Trading
  • Options Scalping
  • Swing Trading
  • Financial Modelling
  • RSI Indicator
  • Bollinger Bands
  • Pricing of Futures
  • Personal Finance
  • Initial Public Offerings (IPO)
  • Value Investing
  • Technical Indicators
  • Candlesticks
  • Chart Patterns
  • Option Greeks
  • ELSS Funds
  • Banking and Insurance
  • Real Estate
  • Gold
  • Book Summaries:
  • Rich Dad Poor Dad
  • Psychology of Money
  • The Intelligent Investor
  • The Richest Man in Babylon
  • Think and Trade Like a Champion
  • Value Investing and Behavioural Finance
  • Trading in the Zone
  • Learn to Earn
  • Book Summaries:
  • Rich Dad Poor Dad
  • Psychology of Money
  • The Intelligent Investor
  • The Richest Man in Babylon
  • Think and Trade Like a Champion
  • Value Investing and Behavioural Finance
  • Trading in the Zone
  • Learn to Earn
  • Tools:
  • CAGR Calculator
  • SIP Calculator
  • eLearnOptions
  • Future Value Calculator
  • Present Value Calculator
  • Atal Pension Yojana
  • Cost of Delay Calculator
  • Become a Crorepati
  • Tools:
  • CAGR Calculator
  • SIP Calculator
  • eLearnOptions
  • Future Value Calculator
  • Present Value Calculator
  • Atal Pension Yojana
  • Cost of Delay Calculator
  • Become a Crorepati

© 2023 Elearnmarkets. All Rights Reserved

  • Visit Elearnmarkets
  • Courses
  • Webinars
  • Financial Guides
  • Get Free Counselling
  • Visit Elearnmarkets
  • Courses
  • Webinars
  • Financial Guides
  • Get Free Counselling

Get Elearnmarkets App

No Result
View All Result
  • Article Categories
    • Basic Finance
    • Derivatives
    • Financial Planning
    • Fundamental Analysis
    • Technical Analysis
    • Marketshala
    • Miscellaneous
  • Language
    • Hindi
    • Bengali
    • English
  • Courses
  • Webinars

© 2020 Elearnmarkets All Rights Reserved