Inadequate Diversification

You can get rich by concentrating all of your investments in one basket, and watching the basket. But that is not a good plan for staying rich.

The employees of Enron who put all of their retirement plan dollars in their company stock would most likely agree with that sentiment. They should have listened to that advice before their company collapsed and their retirement dollars disappeared along with their jobs.

There are investors who wisely spread their investments into several different investments with the confidence that they don’t have all their eggs in one basket. But, if all of their investments are in similar or identical economic sectors, they may not have the benefit of diversification they thought they did.

More disturbing are the stories of investors who choose several funds in the belief they are well diversified, but in reality are invested in a similar collections of the same companies stocks, companies that are often concentrated in the same industry or economic sector.

Many investors completely ignore the possibility of other asset classes like bonds. There is never a wrong time to diversify properly.

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