This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Diversification Is Killing Your Portfolio: Wall Street's Rules, Part 2

Stocks in this article: AAPL F BAC

NEW YORK ( TheStreet) -- In part one of this article we talked about the importance of keeping investment decisions focused on the bottom line and less on the "rules of investing" -- the myths that serve to only qualify your status as an investor while yielding very little results.

One such myth: beating the market requires that one diversifies his or her portfolio. This is simply not true. While it supports another fundamental principle that reminds us don't put all of your eggs in one basket, it makes me question the logic of purposely devaluing your own money.

The Diversification Myth

Think of it this way, why should your bottom dollar not provide the same potential gains as those on the top stack -- just for the sake of diversification, a term that many investors don't know how to execute all that well to begin with. For example, take a company such as Apple (AAPL) -- as recently as three years ago it traded at $90. This year it reached as high as $644 -- representing a gain of over 600%.

Essentially a $10,000 investment in Apple three years ago could have been worth over $61,000 today.

Now, let's consider that three years ago you had opted to play it safe and diversify. Instead of investing the entire $10,000 in Apple, let's say you invested $4,000 and with the rests, you dropped $2,000 on Ford (F), $2,000 on Bank of America (BAC) and since they say it's always good to be in cash you kept $1,000 in a savings account yielding .5% in interest.

This is "true diversification," as opposed to investing in multiple stocks from within the same sector. Let's break it down and see how we would have performed.

Would it have been equal, better or worse than the $61,000 that Apple alone would have provided? Well since we would have played it safe by only investing $4,000 in Apple, it would have given us 44 shares at $90 -- which today would have been worth $24,376.

Let's then take the $2,000 that we dropped on Ford which we could have gotten for as low as $1.75 and giving us a little over 1142 shares. If we factor its high of this year of $13.05 the shares today would have been worth $13,000.

1 of 2

Select the service that is right for you!

Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!


DOW 17,804.80 +26.65 0.15%
S&P 500 2,070.65 +9.42 0.46%
NASDAQ 4,765.38 +16.9840 0.36%

Brokerage Partners

Rates from

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs