Only Rich People Should Diversify!
Beginner investors should not diversify. It's killing your wealth!
We Don’t Care Whether it’s a Bull or Bear Market. We Care Where the Money’s Going
Let’s cut to the chase — stocks are up, and S&P 500 valuations have increased for the last 12 months. We’re still in a bull market.
Only two other historical periods have seen valuations this high for this long:
Late 1990s during the dot-com bubble.
2021 during the pandemic.
Although, if you recall, bear markets followed both!
So, investors aren’t questioning whether history will repeat itself now; they’re questioning when.
Kevin Gordon, senior investment strategist at Charles Schwab, says, “This [data from the last two years] would tell you that the bull is much older or somewhat near the end of its life.”
That’s one opinion, but other strategists aren’t sure. Michael Kantrowitz, chief investment strategist at Piper Sandler, insists that bull markets need a catalyst to end. Right now, he doesn’t see one.
Three weeks ago, I would have disagreed and insisted that there was reason to be concerned. Data showed that unemployment rose then, and the 0.5% interest rate cut could have adversely affected investor sentiment, causing markets to crash… wildly.
However, with inflation down and last month’s good news regarding unemployment, neither seems to be looming over our heads right now.
I won’t even pretend to know when the bull will rest and the bear will wake from hibernation. However, I do know that while we wait for that change, artificial intelligence will continue to be the head of the bull.
As a software engineer, I can attest to this. I see jobs in the market highly geared toward automation, AI (artificial intelligence), and ML (machine learning).
As an investor, NVIDIA and other large-cap stocks are sure-fire ways to win in the long-term investment game. But if large-cap companies that use AI, like Microsoft, Google, and Meta, are outside your budget, think outside the box.
You may want to consider smaller companies that supply the hardware needed to run AI software.
That will be your golden ticket.
Only Rich People Should Diversify
Almost everything you’ve seen online about investing for beginners mentions the importance of diversification. But, they’re wrong…
Diversifying your money is the best strategy if you’re already rich. On the contrary, it isn’t the best strategy for beginners.
That’s because diversification is meant to spread your risk to market volatility across various assets. If one corner of the market performs poorly, the other corners will keep your portfolio afloat.
If you’re wealthy, diversification allows you to maintain your wealth without risking too much at once.
But for beginner investors with limited capital, diversifying means you can only invest small amounts in each asset you have. As a result, the compounding effect is painfully slow.
Here’s proof:
I diversified my Roth IRA portfolio investments for three years. I invested heavily in stable companies with dividend payouts, and on average, I collected $900 yearly in dividends and achieved a 7.01% annualized return.
For context, that’s average for a long-term portfolio. The S&P 500 typically returns 7%—12% annually.
Below, you can see how my portfolio performed against major indices between July 2020 and July 2023:
Unfortunately, my personally diversified strategy produced the lowest annualized return compared to all the major indices.
Tired of the slow growth, I changed my investment strategy in August 2023. Instead of diversifying investments to protect my little capital (less than $50k), I hyper-focused on a few stocks that would likely grow my account quickly.
The difference is staggering:
My annualized rate of return between August 2023 and October 2024 is 49.15%.
Compared to the 7.01% I’d previously made in annualized returns, that strategic change worked wonders for my account.
In fact, as of today, I have outperformed all of the major indices:
Many will disagree, but I don’t believe diversification should be a priority for beginner investors.
Instead, I’d suggest the following:
Research ten growth stocks in various industries
Keep the large-cap stocks; remove the rest
Hyper-focus on two to three with stable volatility
Consistently invest in those companies over time
Tools and Resources
Peter Tuchman is known as the Einstein of Wall Street. He studies the market and tries to understand why it moves in the direction it moves. He always has interesting thoughts, and this time is no different.
Listen to what he says about a possible market crash on The Iced Coffee Hour podcast: