Is it better to diversify my investments or just focus on one thing (like a stock)?

Question

I want to build up a fund for retirement and to pass onto my children. Would it be better to have investments in many different things like some stocks, bonds, real estate, business, life insurance, etc., or should I just pick one or two stocks and put all my money in them?

Answer 1

This is a great question, but it really comes down to your own personal goals and how much risk you are willing to accept.

The more diversified one's investments are, the less likely it is that they will experience a catastrophic loss. However, it is also less likely that they will grow rapidly. Widely-diversified funds tend to experience slow, gradual growth.

Investments that are very narrow -- in just one or two stocks -- have a greater likelihood of growth... or massive loss.

It is very important to learn and practice risk control (capital preservation) when picking individual investments. Diversification is one form of risk control. Another is to invest (put at risk) only a small portion of my capital. For example, rather than investing all of my capital in one stock, maybe I would only use 5-10% of my capital (and have a stop order or put in place to control the losses if the trade goes bad).