Diversifying a portfolio isn’t a good thing.

This may shock you because all the so called “experts” are touting about safe diversified portfolio. Now let me break that illusion, and tell you why you’ll make better investments returns if you put all your eggs in one or two baskets.

Let me start off with a story.

Once upon a time, in a land far, far away, there lived Investor Joe. Joe was one of those people who’s portfolio had 10-30 stocks. Then there was Investor Tom. Tom would never diversify his portfolio; he always owned 1 or 2 stocks.

Because Joe had diversified his portfolio, he never had the time to really analyze and pay attention to any one of those stocks. He believed that his diversified portfolio would be protected from the eventual downturn.

Tom, on the other hand, selected his portfolio with great care. Because he only had positions in 1 or 2 stocks, he had the time to spend on detailed analysis of the company he was investing in.

So these are their results. When the stock market as a whole went up, Joe’s returns matched the market’s gains. Tom, on the other hand, beat the market. However, during that year, there had been times when Tom’s portfolio performed far worse than the market. The Dow Jones had returned 12%, and Joe’s portfolio had returned 12%. Tom, on the other hand, his portfolio returned a volatile 8 – 23%.

Then comes the eventual downturn. Joe thought his diversified portfolio would protect him. That’s the stupidest assumption I’ve ever heard. His portfolio’s decline matched the market’s decline. And since he never had the time to analyze which stocks were good and which were bad, he couldn’t sell the bad ones and hold onto the good.

Tom, on the other hand, had studied his investment (one stock) inside out. He knew where he was headed. So his portfolio still did better than Joe’s.

My point is, a diversified portfolio doesn’t spread out the risk. All you’ll be able to do is match the market’s returns, which is the same thing as buying an index ETF. If you look at many great investors such as George Soros and Jim Rogers. When they have an interest in a market, they don’t just have some skin the the game. They have their whole ass in the game.