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.
