Diversifying your investments is classic advice. If anything, it is underpracticed. This might sound strange but don't worry we will take a closer look at what diversification really means in a future note. The point of this note is to make an even stronger claim than just "I recommend you diversify".
My claim is:
If you do not diversify you are incinerating wealth.
Why?
The reason is grounded in theory but better explained via logic. Let's imagine there is a universe of investments that are fairly priced. Nothing offers an unusually attractive prospect of reward compared to risk. Suddenly a new investment opportunity is presented to the world that appears to have especially favorable qualities (extra return, less risk, or low correlation with the market). Let's consider the scenarios:
The principles underlying these scenarios, in order: