The Wisdom of Diversification

“Invest in seven ventures, yes, in eight; you do not know what disaster may come upon the land.” Ecclesiastes 11:2

This ancient wisdom from the book of Ecclesiastes highlights the importance of diversification when it comes to investing. The wisest man who ever lived, Solomon, advised that one should spread their investments across multiple ventures in order to avoid losing everything in a potential economic disaster, and the principle of not putting all your eggs in one basket remains sound financial advice today.

Looking at the sector allocations of a broad market index like the S&P 500 can provide a good blueprint for diversifying an investment portfolio. As of November 14, 2023, the S&P 500 had exposure to 11 major sectors, with Information Technology (29.17%), Financials (12.68%), and Healthcare (12.57%) making up the top three.

The Dangers of Concentration

While it may be tempting to invest heavily in a single hot stock, it is generally not prudent for that position to exceed 35-40% of total holdings. Even with that allocation, if that one stock takes a major hit, it can drag down the performance of the entire portfolio.

Here’s an example: Let’s say you hold 7 stocks and have $100,000 total invested. You have $40,000 in stock A, and $10,000 6 others. If stock A drops 40%, which happens sometimes, your portfolio falls to $84,000 (-16%). Comparatively, if 3 of your smaller holdings drop 40% each, you would only be down 12% and end up at $88,000.

Wisdom for Today

Investing in diversified mutual funds and ETFs can provide easy access to a varied basket of stocks and bonds. The key is making sure your overall portfolio aligns with your desired asset allocation and risk tolerance, rather than trying to pick individual winners. Following the wisdom from Ecclesiastes by spreading investments across multiple ventures remains one of the best ways to prepare for uncertain times.


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