Both diversification and specialization have a proper place and function for anyone — not just investors and speculators — who depends on an asset’s income stream or capital value. What’s comfortable for one person may be inappropriate for another. However, there are generalizations worth considering.
Let’s start with a few fundamental economic facts. Man has economically advanced beyond a hunter-gatherer existence thanks to the division of labor and specialization. Without specialization and the division of labour it would take six months of work to produce a chicken sandwich. If you own a large number of shares in various market sectors, you’ll have no time to become an expert on all or many of your investments — likely you’ll have no time to become an expert on any one investment. This almost automatically guarantees a mediocre result at best. Banks and stockbrokers make money by selling securities to clients. They would have a conflict of interest if they gave investment advice to the same client they’re selling the investment to. They generally do not give independent financial advice. This explains, in part, why the financial community extols the virtues of diversification. The client is taught to expect mediocrity. Beating the averages by five or ten percent is considered extraordinary. Banks and brokers benefit from low standards of expectation. You should not expect anything different from a party that has a financial conflict of interest with you. Perhaps you should expect worse.
This doesn’t mean that all diversification is bad. The time-honoured diversification formula recommend by the sages is as follows: One third in real estate, one third in liquid assets, cash and cash equivalents, and one third in your own business, or, if you are not self-employed, in your area of specialization. It is unlikely that you will ever hear this from the main street brokers or bankers.
What is recommended: a three part solid base of diversification that gives you the confidence to specialize. Extra ordinary profits are based on your properly relating yourself to economic law and understanding when you are being exposed to propaganda. Economic law can no more be changed by man than the law of gravity irrespective of how convincing the propaganda sounds.