Diversification Is Killing Your Portfolio: Wall Street's Rules, Part 2
One such myth: beating the market requires that one diversifies his or her portfolio. This is simply not true. While it supports another fundamental principle that reminds us don't put all of your eggs in one basket, it makes me question the logic of purposely devaluing your own money.
The Diversification Myth
Think of it this way, why should your bottom dollar not provide the same potential gains as those on the top stack -- just for the sake of diversification, a term that many investors don't know how to execute all that well to begin with. For example, take a company such as Apple(AAPL) -- as recently as three years ago it traded at $90. This year it reached as high as $644 -- representing a gain of over 600%.
Essentially a $10,000 investment in Apple three years ago could have been worth over $61,000 today.
Now, let's consider that three years ago you had opted to play it safe and diversify. Instead of investing the entire $10,000 in Apple, let's say you invested $4,000 and with the rests, you dropped $2,000 on Ford(F) , $2,000 on Bank of America(BAC) and since they say it's always good to be in cash you kept $1,000 in a savings account yielding .5% in interest.
This is "true diversification," as opposed to investing in multiple stocks from within the same sector. Let's break it down and see how we would have performed.
Would it have been equal, better or worse than the $61,000 that Apple alone would have provided? Well since we would have played it safe by only investing $4,000 in Apple, it would have given us 44 shares at $90 -- which today would have been worth $24,376.
Let's then take the $2,000 that we dropped on Ford which we could have gotten for as low as $1.75 and giving us a little over 1142 shares. If we factor its high of this year of $13.05 the shares today would have been worth $13,000.