Many young investors oppose diversifying their portfolio because they believe that doing so will yield smaller ROI. The anti-diversifiers believe that putting all of your money in a single winner will obviously yield greater ROI then dividing your money between a winner and a loser. Any stellar gains made by the winner will be watered down by the loser.
Young investors believe this because it's true! Diversifying your stocks by investing in stocks which have wildly varied performance levels will result in watered down returns! However, this is exactly what many investors do when they diversify their portfolios. But it doesn't have to be this way.
Diversification can be used as a tool for capturing greater gains as well as reducing your risk. How?
By diversifying your portfolio with only similar performing stocks, that are otherwise unrelated. You do this by searching for stocks with growth rates that match one another. Here is an example.
TNH has doubled in the past 3 months and is projected to continue this momentum.
FTK has also doubled in the past 3 months and is also projected to continue rising.
If all of your money was put into TNH or FTK, you would double in 3 months. But if you put half your money in TNH and half in FTK, you will still double your investment in 3 months!! If a stock is not meeting your expectations, drop the stock and find another which will.
It isn't always possible to predict the future. Diversifying in this manner can protect you against incurring the large losses that could result if a stock unexpectedly reverses its trend. Diversification done right can reduce your risk without decreasing your returns.
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