, Jim Rogers Blog: Jim Rogers explains why you shouldn't diversify your portfolio too much

Thursday, June 14, 2018

Jim Rogers explains why you shouldn't diversify your portfolio too much

Diversification is generally considered one of the basic tenets of investing and financial planning. Owning a mix of assets, ideally with a low correlation - including, stocks, bonds, real estate and gold, for example - is Investing 101.

That is… unless you're one of the world's most famous investors. Jim Rogers, who I've written about recently (see here, here and here), is not a fan of diversification…

Jim doesn't buy into the cult of asset allocation

"Well, I know that people are taught to diversify. But diversification is just that's something that brokers came up with, so they don't get sued," Jim told me recently when I sat down to chat with him here in Singapore. Then he added, "If you want to get rich… You have to concentrate and focus."

This obviously goes against conventional thinking. But this kind of thinking is what made Jim one of the world's most successful investors. He co-founded the Quantum Fund - one of the world's most successful hedge funds - which saw returns of 4,200 percent in ten years.

He quit full-time investing in 1980 and went on to travel the world a few times. He also wrote several books about what he saw and learned. Even if you're not a travel or money junkie and know little about finance, these are some of the most educational and entertaining books you'll ever read about investing.
Why (maybe) you should diversify

I've also written about the importance of diversification to reduce risk in your portfolio. As the saying goes, don't put all your eggs in one basket. But you also need to make sure they're not all on the same egg truck, either.

Diversification can limit the risks that are specific to a company or industry. For example, bad (or fraudulent) company management is a firm-specific risk. An airline employee strike, which has an industry-wide impact, is an industry risk. These are called "diversifiable risks" because they aren't directly related to the broad financial market system.


Market risk (also called "systematic risk" because it relates to the financial system as a whole) is unavoidable for anyone investing in financial markets. Market risk is affected by things like interest rates, exchange rates and recessions. Diversification can't touch market risk.

The graph below shows these two types of risk. Every investor is subject to systematic risk. Diversifiable risk is higher if a portfolio includes a small number of holdings. And diversifiable risk declines as the number of holdings in a portfolio increases - to a certain point. Having a portfolio with five securities definitely beats a portfolio of just one security. But diversifying beyond 30 securities doesn't bring any additional benefits in reducing overall portfolio risk.

- Source, Business Insider