Warren Buffet once said “diversification is a protection against ignorance – it makes very little sense for those who know what they’re doing.” This is perfect for me, because I have no clue what I’m doing and have little interest in becoming an expert in whatever I’m buying into.
I’m assuming we all know about risk and everything. But I want to pad the word count on this a bit so:
- Unsystematic risk: the risk you take when you punt on a stock – it’s lower when you’re buying well-established gigantic companies with huge market caps and way higher when buying speculative pennies, however your rewards are usually reflected in that.
- Systematic risk: the risk of owning shares. You can’t do anything about this, you just have to accept that occasionally the entire market can and will shit its pants.
So you can’t do anything about systematic risk (other than be like hurr durr I’ll put my money in savings and lose it to inflation) but you can deal with unsystematic risk by diversifying your holdings. But at what point does diversifying become pointless?