Most investors would agree that diversification is a good thing.
Owning a mix of assets, ideally with a low correlation, including, stocks, bonds, gold and real estate, for example, is Investing 101.
But legendary investor Jim Rogers thinks this strategy is for the birds. In a recent discussion, he shared his thoughts on global investment trends, what he is buying now, where bubbles might be forming and asset allocation.
Contrary to conventional investment strategy, Rogers doesn't "do" asset allocation. Instead, he thinks putting all of one's eggs in one basket is a better strategy.
"Well, I know that people are taught to diversify, but diversification is just that's something that brokers came up with, so they don't get sued," Rogers said. "If you want to get rich ... You have to concentrate and focus."
Rogers' willingness to be a contrarian is exactly why he is one of the world's most successful investors.
He co-founded the Quantum Fund with George Soros, and it became one of the best-performing hedge funds in history. From 1970 to 1980, the fund gained 4,200%, while the S&P 500 only advanced about 47%.
In 1980, at 38, Jim retired from full-time investing and hit the road, traveling around the globe twice and set a world record. He has written a number of best-selling books that offer investment insights, political commentary and travelogues.
Many experts believe in balancing risks and rewards in portfolios through asset allocation. In other words, investors shouldn't put all their eggs in one basket, they they also need to make sure that their baskets aren't all on the same egg truck, either.
There are two types of risk that affect assets: market, or systematic, and diversifiable.
Market risk affects a large number of asset classes such as stocks and bonds. It is also called systematic risk because things such as exchange rates, interest rates and recessions affect the financial system as a whole.
Portfolio diversification doesn't change this kind of risk.
Unlike systematic risk, diversifiable risk can be offset through diversification. One type of diversifiable risk is firm-specific risk or the risk of losing on an investment due to company or industry-specific hazards.
A mismanaged company is an example of firm-specific risk.
Anything that affects an entire industry, such as an airline employee strike, is an industry-specific risk. Both company and industry-specific risks are too small to directly affect the broad financial market system.
This makes them "diversifiable risks."
The chart, below, shows these two types of risk.
Systematic risk, shown by the red line, constantly affects everyone in the investing world. However, the black line shows how diversifiable risk changes depending on how many securities one owns.
Diversifiable risk is higher when an investors has fewer securities in the portfolio. And it is lower when the investors has more holdings in the portfolio.
Owning a portfolio with one security is risky. Having five securities in one portfolio is much better.
But there are limits, and a portfolio containing more than 30 securities doesn't reduce any additional diversifiable risk.
So Rogers thinks that investors can put their eggs all in one basket, but need to "be sure you've got the right basket, and make sure you watch the basket very, very carefully."
For most of us, choosing the right eggs to put in the correct basket and keeping an eye on it is easier said than done. It is a high-risk, high-reward game.
Rogers' investment strategy isn't for everyone, and he acknowledges that.
"If you don't get it right, you're going to lose everything, but if you get it right, you're going to get very rich. And by the way, don't think it's easy getting it right," Rogers said.
"It's not easy," he said. "It takes a lot of insight and work and everything else, but, if you get it right, you'll be very rich."
This article is commentary by an independent contributor.
Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.