The Myth of Diversification

In one of our first lessons about finance we heard the word Diversification.
Wikepedia give us one interesting definition - Diversification in finance involves spreading investments around into many types of investments, including stocks, mutual funds, bonds, and cash. Money can also be diversified into different mutual fund investment strategies, including growth funds, balanced funds, index funds, small cap, large cap, and sector-specific funds. Geographic diversification involves a mixture of domestic and international investments.

Why we should use the Diversification? Diversification reduces the risk of the investments. For example, if we buy stocks of two different companies working in different industries, and occurs some problems in one of then (problems with the supply of one of the inputs), the money of the investors goes to the other companies belong to the other industry (stocks prices will rise). So, the money that you lose in one company will be the money that um win in the other, your risk is reduced. Of course this example is in a world of two industries with one company each other. In the real world you should have money in all companies in all industries.

But no risk, no return. This way you will never be rich. What you lose in one investment you win in the other. Diversification reduces risk, this way you can afford some money, but not a big amount of money. The secret is anticipating the rise of the stocks, using information. Information is everywhere, you only need to pick it up. You can obtain the same result of diversification (reduce the risk) with a better return, by studying the market. This kind of exercise you can make for everything, and turnout your life better. In the above example you would buy the stocks of the second company and realize a great profit.