Notes on Diversification

Introduction

• Definition: Diversification is a key investment strategy.
• Importance: Protects against risks by spreading investments across various assets.

Key Concepts of Diversification

• Don't put all your money in one place:
  • Avoid investing in a single stock, industry, or country.
  • Importance of spreading risk in your portfolio.

Risk Management

• One stock risk example:
  • If all money is invested in one stock and it fails, the loss is substantial.
• Sector risk example:
  • Investing all in one sector (e.g., hospitality) can be risky (e.g., during a pandemic).

Types of Diversification

• Geographical Diversification:

  • Invest locally and offshore (e.g., US stocks vs. South African stocks).
  • Mitigates currency risks and economic fluctuations.

• Investment Vehicles:

  • Use of ETFs (Exchange Traded Funds) for wider exposure to different companies.

Benefits of Diversification

• Exposure to new investment opportunities:
  • Investing in ETFs can introduce you to companies you may not have considered.

Caution on Over-Diversification

• Risk of having too many stocks:
  • Example: Having a thousand stocks in a portfolio can dilute focus and research efforts.
  • Difficulty in making agile portfolio changes with too many stocks.

Final Thoughts

• Metaphor on diversification:
  • "Don't put all your eggs in one basket" is traditional.
  • Alternative suggestions:
    • Don't put all your plants in the same spot.
    • Don't keep all your favorite songs in the same playlist.
    • Don't store all your photos in one album.

Conclusion

• Emphasizes the importance of a balanced and well-researched investment portfolio.