Pershing Square hedge fund manager William Ackman says that investment managers who focus on keeping their portfolios diversified aren't smart, they're just plain lazy.
"I think most investors overdiversify because they're lazy," Ackman said during a recent speech at the Active/Passive Investor Conference.
"Diversification covers up ignorance."
Many large investors like Ackman haven't done enough research into the companies in which they invest, Ackman claims.
“If they've got 200 positions, do you think they know what's going on at any one of those companies at this moment?” he asks. "As a result of overdiversification, their returns get watered down."
Most individual investors don’t have the expertise – or time – to build a diversified investment portfolio with the proper asset mix, notes financial writer Jason Alderman.
“That’s why most 401(k) plans and brokerages like Schwab and Fidelity offer portfolios with varying risk profiles, from extremely conservative … to very aggressive,” Alderman writes in the East Texas Review.
“Typically, each portfolio is comprised of various investments that combined reach the appropriate risk level.”
“One challenge with asset allocation is determining your appetite for risk,” Alderman points out.
“Would you lose sleep investing in a fund that might potentially lose money, or are you willing to risk temporary losses for the possibility your account may grow faster?”
“The riskier the investment, the greater its potential for financial reward over the long haul.”
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