Diversification, Vegetables and Bill Gates

Riepe, Mark W.
May 2002
Journal of Financial Planning;May2002, Vol. 15 Issue 5, p36
Academic Journal
This article discusses the factors that contributed to the diversification of investors in the U.S. as of May 2002. The Enron scandal and the heavy exposure of its employees to their company's stock has resulted in the media spotlight being focused on the issue of investors whose portfolios are concentrated in the stock of one firm. While legislators, regulators and investment professionals frequently pay homage to the principle of diversification, investors consistently appear to be underdiversified. It is no secret that some people invest because they want to get rich. They look at people like Bill Gates and quite rightly point out that he did not get to be where he is today by investing in an Standard & Poor's 500 index fund or a diversified portfolio of mutual funds. Individuals with this mindset probably hear the diversification gospel and explicitly reject the message as being inconsistent with their own investing objectives. Investment advisors who try to steer clients completely away from concentrating their portfolios are likely to face resistance. Advisors, therefore, should seek to mitigate the effects of these traits rather than try to eliminate them. One technique for equity-oriented investors is to structure the portfolio in a way that has a large, well-diversified set of core positions that basically track the over-all market. Then supplement these positions with themes that are expected to outperform the market. Ideally, participation in these themes would be done in a diversified way, such as buying a number of energy stocks instead of just one or two. But if that is not possible, it is okay to take a concentrated bet as long as the size of the bet does not get too large.


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