Mark Cuban is a smart guy. And when he said diversification is for idiots, he was wrong, but also right.  Like most public figures, he could use a PR person filtering his words for him. What he should have said is: “There are a lot of smart people who specialize in medicine, law, physics, or software design, but not in stock analysis. That doesn’t make them idiots.” I don’t hold it against Mr. Cuban. It’s not easy to be in the spotlight and always say the right thing at the right time, and in the age of the internet, your words are permanent. In solidarity with Mr. Cuban, I’ve come here today to stick my foot in my mouth as well.

The average person is not a stock analyst; therefore, diversification is a safer strategy for the average person than stock picking. Someone capable of the analysis and research to narrow down a few positions to focus on has no reason to diversify. Diversifying across an index or mutual fund would dilute the opportunity they seek. That is where Mr. Cuban is 100% right, and that is why our Mainsail Equity Model focuses on growth opportunities in fewer than 20 stocks at a time. Only 15 at the moment. Not because Mark Cuban says so; this has been a long-proven strategy.

You could hire a financial advisor to pick stocks for you, but most won’t because they have hundreds if not thousands of accounts to “manage” and they won’t have time to pay attention to what’s going on in yours, so they will do what’s easiest for them – diversify your portfolio, and tell you it’s what’s best for you. The term fiduciary means an advisor is obligated to act in your best interest, but there’s still a subjective grey area. Three different advisors can have three different opinions on what’s best for you. And maybe doing what’s best for you isn’t within their means, so they offer you the best they’ve got. A financial advisor may not even understand stock analysis. It sure isn’t covered in the securities licensing exams.

This isn’t to say there’s no place for diversification. Just as diversification can dilute some growth potential, it can mitigate some risk. Risk mitigation can be of value to an investor who has already amassed wealth and is no longer seeking focused growth. I’ll undoubtedly recommend diversification when a situation calls for it. It’s just that some of us feel it’s a widely and unjustly overused strategy.

The average investor will turn to the average financial advisor and their portfolio will be diversified across hundreds of stocks. Some will perform well, and some won’t. It might turn out okay. Just okay isn’t good enough for Mark Cuban. Is it good enough for you?

I do understand this is a wildly unpopular sentiment. If a diversified portfolio is what gives you enough comfort to be in the market, then please don’t let me stop you. We all have our own comfort level. Considering each side of the coin has served me well in my years, so I offer a different perspective to you in hopes I can broaden your views as well.

S&P 500 index funds have averaged a 13.6% return over the last 10 years, which is fantastic. That beats bonds yielding 4-5%, which are beating savings accounts paying you less than 1%, which beats hiding your cash under your mattress. It’s all relative.

You can avoid the water, or wade in the tide pools, or swim out past the breakers, or surf the tallest waves. Most of us can learn how to do any of those. Most of us can gain enough experience to become familiar with and comfortable with any of those. Sometimes you’ll be underwater, holding your breath. Just avoid the sharks.

Live long and live well,

Alyse