by Eli Chisholm

Created on: October 30, 2008

I have a number of favorite sayings and quotes when it comes to personal finance, but none I hold so dear as this one, "Wide diversification is only required when investors do not understand what they are doing." Warren Buffet said that, and I think that holds just a tiny bit of clout. A lot of larger brokerage houses or mutual management companies tell the populace as a whole that diversification of investments over a large number of general stocks or industries leads to less risk of loss, since if one sector of the market drops, the others will go up and shore your nest egg. I've got another quote for that, "Risk comes from not knowing what you're doing."<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" /

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Warren Buffet said that too.
Diversification of investment, in principle, minimizes risk to your portfolio. With a lack of financial education, using a shotgun method at choosing companies to buy runs the best chance of picking at least a FEW winners. Unfortunately, it also minimizes your rewards as well, since playing the 'safest' route possible forces an investor to miss out on many amazing opportunities.
Why, you might ask, is that the case? Well, nearly all amazing opportunities in the investment world start off small, or look risky to investors. Microsoft was right out of left field for it's time; who cared about a company that had a lock on personal computer licensing back then? It was laughable to consider ANYBODY with a home computer other than the exclusively wealthy. Or Amazon.com as well. It was silly, at the time, to consider people buying ANYTHING online; everybody thought Barnes and Noble or Borders would crush them. Yet now, Barnes and Noble and Borders are tailing behind amazon.com, and emulating THEM.
Neither of these would have been recommended to a person who wanted to 'play it safe' at their initial offering. Now, it seems, they are a staple of a safe, diversified portfolio.
A lot of people think they don't have the time to learn about investments, that it's too complicated, and that they are better off leaving it to other people. I, personally, am not too fond of giving my money to somebody that won't guarantee they won't lose it; if I'm going to squander my cash, I'd rather do it myself.

Some people are fond of the idea of mutual funds; they are full-packaged diversified portfolios in easy to swallow bundles. I personally hate them for a number of reasons, but the simplest way to compress all of that ire is like

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