This Investors Business Daily article entitled “Too Much Diversification Can Hurt You” is a good example of the kind of “throw away article” that the mainstream financial media churns out on a daily basis.
The premise is that too much diversification can hurt you because you might pick a bunch of bad stocks. The article gives this helpful little bit of advice:
“Research shows it’s better to own several high-quality stocks than dozens of stocks.”
Now there’s some enlightenment I can take to the bank!
For some unknown reason the article doesn’t quite come out and say it, but the implied reasoning is that you will pick bad stocks if you “diversify” and you will pick good stocks if you don’t “diversify.”
That’s an assumption that is silly at best and harmful at worst. If you are able to pick good stocks, then you should be able to pick them whether you “diversify” or not. Picking good stocks and diversifying are not mutually exclusive.
There may be something redeeming further down in the article. I don’t know. I didn’t make it that far.
I find it comical that these short, silly little articles do away with decades of research into the benefits of diversification with a simple swat of their proverbial hand.
So why do these silly/harmful articles get written? I’ll give you some options:
A) To share helpful knowledge
B) To teach people how to make money in the stock market
C) Because a journalist has a deadline and has to come up with something or he’ll lose his job
If you don’t know the answer, follow the advice I got from a friend as I walked in to take the ACT many years ago: “Always guess C.”