Diversification Versus Concentration of Wealth

[Bryan Hancock]

I know many on BP concentrate much of their wealth in real estate because it is what they know well. I was wondering what everyone's thoughts are on the diversification versus concentration decision. Are you an advocate of concentration to grow wealth and diversification to maintain it? If you do something very well are you an advocate of keeping your bets concentrated in this area?

What is your ideal portfolio and why?

[J Scott]

For those who aren't skilled investors, diversification is an amazing tool. Over the past 80 years or so, a highly diversified portfolio has historically returned between 6-8% annually, which is pretty good for just sitting back and letting the markets do their thing.

But, if you can achieve even a few percent higher than that 6-8% through skilled investing (I'm NOT talking about speculating), you can significantly increase the speed at which you can accumulate wealth.

As any experienced investor knows, the key to wealth is compounding. To give an example for anyone reading this thread who hasn't done the math (not directed towards Bryan and many others here, as I'm sure they knows this as well as I do):

Let's say a 20 year old invests $2000 per year in a diversified portfolio (returning 6-8% per year). At 65, that person will have about $600K.

Now let's say that same 20 year old invests $2000 per year in something that returns 15% annually -- by 65, that person will have over $5M...

That few percent extra compounded return translates into a ridiculous increase in earnings. And that's just by investing $2000 per year!

Btw, earning 15% (or even 30%) annually isn't too difficult if you have a specialized expertise in some form of investing. Whether it's real estate, companies, stocks, etc, 15% is certainly achievable...

So, my vote is to spend some time becoming an expert in some form of investing and once you do, start plowing your money in...this is how Warren Buffett got wealthy, btw...