Diversification Results in Mediocrity

TruePoint Capital

The importance of a “diversified portfolio” is likely the one piece of investment advice that is most widely promulgated to the masses.

Diversification means dividing your investment capital across as many potential winners and losers as possible because it’s impossible to be sure which ones will “win.”

As a result, the most common thought is that we should spread our savings around in various domestic and foreign index funds and bonds. This, however, actually results in a benign portfolio with minimal potential for any significant gain.

Warren Buffet has been quoted as saying, “diversification is protection against ignorance. It makes little sense if you know what you are doing”.

Similarly, Andrew Carnegie famously quipped, “put all your eggs in one basket and then watch that basket”.

Mark Cuban is known for his statement, “diversification, that’s for idiots.”

The truth is that the more diversified your investment portfolio gets, the harder it becomes for you to be an expert in each of your holdings. For instance, an index fund may consist of over 1,000 different individual stocks. At that large scale, it becomes virtually impossible to read the annual reports for all of the companies in which you own shares. You would not be able to monitor their respective industries and competitors closely.

What the Warren Buffets, Elon Musks, Jeff Bezos, and Mark Zuckerbergs of the world understand is that the average investor hasn’t yet figured out that a diversified portfolio, by definition, will only produce modest returns.

Your money will do whatever the economy does (which is to trickle upwards at around 6% per year on average, which will barely outpace inflation).

By the way, the vast majority of the personal wealth of Musk, Bezos, and Zuckerberg are all invested in single companies (Tesla, Amazon, and Facebook, respectively).

Despite what the talking heads on CNN Money might say, you’re much better off making a few strategic investments in sectors that you understand very well. You will be able to better monitor them closely, rather than trying to spread your capital around to “hedge your bets.”

Instead of buying into a new asset and wondering, “will this diversify my portfolio?”, you should first ask yourself these three critical questions:

1. Does this investment produce reliable revenue streams? Is this an income investment? 

This is the biggest overlooked key to building real wealth for yourself that multiplies year over year.
Your investments absolutely must generate steady, predictable income for you. Each year, you’ll reinvest this income to increase your passive revenue further while also accumulating more and more principle, or “net worth.” Some great examples would be to purchase income-producing real estate, to invest actively in a business enterprise with periodic distributions, or to invest in stocks with high-yield dividends passively.

2. Is there a legitimate chance my principal will exponentially grow? Is it dependent on Wall Street? 

In addition to passive revenue, you’ll also need to obtain a decent multiplier on your initial investment to accelerate your wealth-building plan. This means low-volatility “stable” asset classes like bonds and annuities aren’t a good bet.

The assets I mentioned in the previous section all check this box as well. Real estate can easily double or triple over the course of 7-10 years, depending on the market. The right business enterprises and undervalued stocks can multiply their value many times over.

3. Do I have an expert I can invest in or partner with? Or am I willing to become an expert?

The final question is the most important one you’ll need to be able to answer “yes” to before you decide to invest in something.

Many busy professionals do not have the time to become an expert in the asset class they’ve chosen, so they rely on partnering with a proven team. It’s often more effective for professionals to focus on their current occupation or business and partner with someone like TruePoint Capital, who has spent years developing deep expertise in a particular sector.

Before you bring on a new partner or team member to manage your investments in any area, it’s important to vet them by assessing their knowledge and experience. Do they have support, resources, and a reliable team behind them? Do they have an exit strategy for each investment before buying in?

Be sure to take an honest look at your investments. Are you over diversified? Do the many losers in your portfolio weigh down the few winners? If so, then it’s time to trim the fat in your portfolio and focus on the winners.

Get rid of all assets that don’t generate steady income, have massive growth potential, and that you or someone on your team isn’t a true expert in. Then sit back and watch your gains go through the roof.

Take control of your portfolio and invest with intention.

Kyle Jones