Jim Rogers on Diversification: Good for Limiting Risk, Awful for Maximizing Returns

by: Green Griffin Analyst

Many individual investors select stocks, bonds or mutual funds solely to create a diversified portfolio. Buying based only on diversification will deliver only average performance (at best).

If you possess the skills and are prepared to put in the necessary time and hard work to become a top 20% performer, then why accept being mediocre? If there are insufficient quality investments available, then be patient and wait for the right opportunity. Diversification is good for limiting risk (to an extent); it’s awful for maximizing return.

I’ve always had deep respect for Jim Rogers. Once again he garners my respect when he hits the nail on the head with regards to diversification.

The following is an excerpt from this article:

Diversification is something that stock brokers came up with to protect themselves, so they wouldn’t get sued for making bad investment choices for clients, says commodities bull Jim Rogers.

“Henry Ford never diversified, Bill Gates didn’t diversify,” Rogers told Business Week.

“The way to get rich is to put your eggs in one basket, but watch that basket very carefully. And make sure you have the right basket.”

Diversification is the end result of applying asset allocation strategies, which derive from modern portfolio theory, an offshoot of economics from the early 1950s.

Asset allocation holds that investors should combine various asset classes that do not correlate perfectly to achieve a diversity that protects some asset classes when others are adversely affected.

“There is a saying that you have to concentrate to get rich and diversify to stay rich, and over the past couple of years that has not worked,” Paul Vaillancourt, senior vice-president of Franklin Templeton Investments, told Canada.com.

“I don’t want to say diversification is a myth, but it is overdone.”

Another saying comes to mind when I think about diversification: “The fool says: ‘Do not put all your eggs in one basket.’ Which is just another way of saying, ‘Scatter both your money and your attention.’ The wise man, however, says: ‘Put all your eggs in one basket, and then watch the damn basket.’”

The only question becomes, how does one choose the right basket and have the ability to watch it like a hawk? The answer: get a professional investment advisor to do it for you. That’s what they’re paid to do.