201 Stock: Diversification vs Focus

News from Money Magazine:
http://money.cnn.com/2009/03/24/pf/funds/bernstein_diversification.moneymag/index.htm

Diversification reduces your risk because any investment has risk but they won't all go down at once ... right?

In fact, some days they do and just like it fall like hell recently. If so, should we give up the idea of diversification?

Option 1: Invest all in 1 basketWhat if you invest in Japan Nikkei 20 years ago? If you didn't diversify beyond your own market, you would have lost 2.5% a year since then, while stocks worldwide grew 4.9% annually.
Option 2: Quit and keep cashIn long run, a diversify portfolio would still beat Treasury bills.

In conclusion:
Investment wisdom begins with the realization that it's the decades, not the days, that matter. And over the long term, diversification really does protect your portfolio.
William J. Bernstein is co-founder of Efficient Frontier Advisors and the author of "The Four Pillars of Investing" and "A Splendid Exchange."

Bilibala's Comments:

Yes, diversification is a successful method to reduce certain specific risk that happen to one single stock or one particular geographic area at the same time provide a more stable (or less volatile) investment return.

But!!There is a trade off.
It will only provide investors an "average" return in long run with lower risk in short run.
So, is there another way to max return and min risk?

Yes, by doing the following:

1. Study, study, study!!!

• Diversification min risk by quantity and study min risk by quality.
• A complete and detail study on macro economic environment, mega trends and stock analysis will help you to reduce and avoid lots of risk;

2. Less is more

• Concentrate on only a few investments / stocks
• There are only few "A+" students in one class
• Same to stock market, there's only a small % of "A" or "A+" industry and corporation in the world.

3. Let it grow & let it flow in long term

• Forget about "buy low, sell high", only God can guess right all the time;
• Remember to "buy more at low, don't sell high, buy high and keep buying..."

4. Keep transaction cost / management fees / capital gain tax as low as possible

5. Admit mistakes and correct it ASAP, if there is any.