title: The Power of Diversification description: [AFW S.2.6] Investment Principle #6 published: true date: 2026-06-30T08:07:54.398Z tags: editor: markdown dateCreated: 2021-04-19T04:04:37.560Z
Watch Securities Principle, 7 - The Power of Diversification (2023-05) VIDEO
Because of the unknown future, diversification is the only practical solution. I choose to diversify because I do not know the future:
- No one else knows either.
- It doesn't matter that I don't know.
"I will *never** own enough of any one thing to be able to make a killing in it. Nor will I ever own enough of any one thing to be able to be killed by it. Diversify!"* -Nick Murray
Advisor "I’m firmly committed to the principle that broad diversification is the ultimate risk management device. I’ve always said to you that we will never own enough of any one investment idea to make a killing in it, nor enough to get killed by it. If you want to take five or even ten percent of your portfolio and put it in (whatever the fad is), I recommend against it, but I’m certainly not drawing a line in the sand with my sword. If you wanted to go much beyond that, I have to tell you you’re on your own.”
Which Elevator Would You Ride In?¶
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
These are elevators. If there were an earthquake, which one would you rather be in?
Invest $10,000 for 25 years¶
| One "Safe" Investment | Diversified |
|---|---|
| Save $10,000 at 6% | Speculate $2,000 lose it all (-100%) |
| Save $2,000 under matress (0%) | |
| Invest $2,000 at 6% | |
| Invest $2,000 at 10% | |
| Invest $2,000 at 12% | |
| ________ | ________ |
| $42,918 | $66,252 |
Diversification is our Equity Sacrament¶
"Note that in an intelligently diversified equity portfolio, some component (or even components) will always be "underperforming." That's how you know you're really diversified." -Nick Murray
Read Nick's ATY 254 September 11 - Voice of the Tortoise PDF
Read Nick's ATY 139 May 19 - Diversification Kills Mania PDF
Read Nick's NMS 24 - Explaining Equity Diversification PDF
Read Nick's NMS 26 - Diversification as the antidote to mania: the general principle PDF
Read Nick's NMS 27: Diversification as the antidote to mania: an analogy from literature PDF
Read Nick's NMS 28 - Diversification: one final caution PDF
Example of Diversification¶
As an example, the American Funds Growth Portfolio consists of seven individual mutual funds and collectively it invests in 1,285 companies from 47 countries among the following industries:
