11/29/2005

Diversification isn't for everyone

I came across an article that I found to be very informative, and it dealt with the issue of investment diversification. In Robert Kiyosaki's diversification article, he brought up the notion that diversification can be good, but can also limit one's potential for higher returns. His point was that if you spend a considerable amount of time, and effort in trying to find good investments, you will be able to eliminate some risk, while likely getting higher returns, than if you just simply diversified to reduce risk. I never thought of investing in that light, but I think that he has an excellent point, and I think that his method could be very useful for certain types of investors, proving that many things that happen in the economy are driven by people's behavior.

3 comments:

Liz said...

I think that Robert is a very smart investor. I have read a lot of his writings. I think also that it takes a certain kind of person to do what he does. I found that in his writings he made it seem very easy to be an investor. But I know from experience that it is not and by diversifying, one can protect their investments from a lack of experience in making a mistake.

Elijah said...

I have also read a little of his writings and found it to be very informative. I guess if you study enough about investments and feel comfortable with your situation, you could invest in a way that will raise the risk factor of your investment while bringing higher returns. But, what I have always been taught was that you don't want all of your eggs in one basket. To split up your investments is the best route, although maybe not the one that will maximize your returns. But I don't think that the majority of people we know are trying to maximize their returns in the stock market. I think that it is just another way to earn an alternate income.

Dr. Tufte said...

I think you've all missed the big picture. Yes, diversification is good. But the big picture is that by diversifying you can reduce your risk a lot while only reducing your return a little bit.