Warren Buffett said this about diversification:
I have 2 views on diversification. If you are a professional and have confidence, then I would advocate lots of concentration. For everyone else, if it?s not your game, participate in total diversification. The economy will do fine over time. Make sure you don?t buy at the wrong price or the wrong time. That?s what most people should do, buy a cheap index fund and slowly dollar cost average into it. If you try to be just a little bit smart, spending an hour a week investing, you?re liable to be really dumb.
If it?s your game, diversification doesn?t make sense. It?s crazy to put money into your 20th choice rather than your 1st choice. “Lebron James” analogy. If you have Lebron James on your team, don?t take him out of the game just to make room for someone else. If you have a harem of 40 women, you never really get to know any of them well.
While I’m not sure he threw in the harem analogy, Buffett makes an excellent point about diversification. I’m a huge fan of diversification because I am the “one hour a week” investor and I don’t know what I’m doing. While I could be confident in my picks, the smarter side of my brain keeps telling me that I should do the prudent thing and go with an index fund – so I do.
(if you’re curious why Buffett used Lebron James rather than, say Michael Jordan, it’s because the two are buddy-buddy; it makes me respect Lebron James because he’s clearly a much sharper man than most)