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AFW 1.1.6 — Investment Principles — #6: The Power of Diversification

6. Diversification

Quotes

  • "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

  • “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

  • “Don't struggle to find the needle in the haystack; just buy the haystack.” ―John Bogle

  • “Don't put all your eggs in one basket.” ―Old bank line

Resources


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.


Script

"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.”


Four Napkin Presentations

Which elevator would you rather ride 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

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:

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