“Here is part of the trade-off with diversification. You must be diversified enough to survive bad times or bad luck so that skill and good process can have the chance to pay off over the long term.”Joel Greenblatt
I first became interested in investing when the Halifax building society became a bank in 1997 and I was handed some shares by the company. I had no other investments at the time and obsessively followed the company fortunes on a daily basis.
My investing goal was to build wealth over time. But I had 100% of my investments with just 1 company, so if they did well, I did well. As they started to do badly, so did I.
I had absolutely no idea what I was doing and was seeing big increases one day and losses the next. Looking back, I should have realised my all my eggs were in one basket, famously a risky strategy.
Instead of having a single investment in an area I didn’t know enough about, I should have built up my knowledge and spread my money across a mix of companies, big and small, from different industries and ones that make money from different parts of the world. The idea being that if you make one or two bad calls, your other investments will pick up the slack.
To make this easier, I could invest in funds that have diversification built into them, so that the damage from any bad calls wouldn’t impact on me as much. Of course, the opposite is also true, I wouldn’t want to miss out on any big gains by being spread too thinly. There is a balance between spreading your risk so that you can minimise any damage, but having enough concentration to make still feel the benefit from the big winners.
As it happened, Halifax nearly collapsed in 2007 and was taken over by a rival, Lloyds. The value of my investment collapsed. Broken egg all over the floor. 😦