1 Warren Buffett Investment Advice You Might Want to Ignore | personal financing
Warren Buffett is one of the world’s most successful investors, so when he’s giving advice, it’s often worth listening. However, not all of his advice is suitable for every investor, and some of his advice may be risky for some individuals.
While everyone’s situation is different, there is one piece of advice from Warren Buffett that you might be better off ignoring.
Should you diversify your portfolio?
Diversification is the process of buying a variety of stocks from multiple industries to reduce risk. If one or two of your stocks are not performing well, you still have a strong safety net of healthy stocks to protect your portfolio.
in 1996 Berkshire Hathaway Despite this, Buffett argued at a shareholder meeting that “diversification is protection from ignorance” and that it “is very meaningless to anyone who knows what they’re doing.”
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The logic behind this advice is that there are relatively few companies that are widely successful. Instead of spreading your money across 20 to 30 stocks (most are average), Buffett suggests putting as much as possible into a very small number of stocks that have the greatest potential for growth.
The risks behind this approach
While this strategy makes sense in theory, it’s not the right move for everyone – and there are some important risks to consider.
- It requires a huge amount of research: If you’re doing it all in a few stocks, you’ll want to make sure those stocks pay off. This will often require hours upon hours of extensive research to make sure you are investing in the right places.
- There is no room for errorVery wealthy investors can often take on more risk. After all, one bad investment is unlikely to bankrupt someone like Buffett. But when your retirement is on the line, even a simple mistake can ruin your financial future.
- Stocks can sometimes be unpredictable: If everyone knew which companies would be next Amazon, there will be many billionaire investors. But even promising stocks can take unexpected turns, and there’s no way to know with 100% certainty which investments will see long-term growth.
Even if you did everything right, there is always a chance that the stock will not pay off. And if you’re putting all your money behind a few stocks, that’s a huge risk.
How diversification can keep your money safer
When you spread your money over a wide variety of stocks, you can still earn great returns without much risk. Now, it is still important to choose your investments wisely because the more successful the stocks you own, the more you can earn. But you also have more wiggle room since one or two swings won’t necessarily flood your entire portfolio.
It is possible to over-diversify. When you own a lot of shares, your risk is much lower, but you also limit your potential earnings. Although there is no fixed number for how many you should own, the general guideline is to have approximately 20 to 30 stocks from various industries in your portfolio.
There is no one-size-fits-all strategy for investing, but it is important that you find the right one for you. While some investors will benefit from Buffett’s “less is more” approach, a well-diversified portfolio is a safer option for most people.
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John Mackie, CEO of Whole Foods Market, an Amazon company, is a member of The Motley Fool’s Board of Directors. Katie Brockman has no position in any of the listed stocks. Motley Fool has and recommends positions at Amazon and Berkshire Hathaway (B shares). Motley Fool recommends the following options: long January 2023 calls of $200 on Berkshire Hathaway (B shares), short January 2023 calls of $200 on Berkshire Hathaway (B shares), and short January 2023 calls of $265 on Berkshire Hathaway (B shares) ). Motley Fool has a disclosure policy.