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Which is Better - Diversify or Focus Investments

By: Steve Johnson

5/29/2008 - 46 Comments

In a long standing debate that I have going about diversifying vs. focusing investments, here is my take on the issue.

If you read through the many personal financial blogs about Robert Kiyosaki, there are a great many people that don’t agree with Robert’s views on diversifying.  In Robert's book, “Why we want you to be Rich”, Robert says:

“Personally, I do not diversify, at least not in the way the financial planners recommend. I do not buy a lot of different assets. I would rather focus. In fact, the way I get ahead is by focusing, not diversifying.”

This language has given Robert a lot of grief online, as many financial advisers highly recommend diversifying. To further clarify, Robert has just added some comments about his view of diversification with his latest blog post at Yahoo Person Finance. Here is what is says:

"Diversify at Your Peril

Moreover, in January 2008 the Federal Reserve Board dropped the interest rate twice over a period of just eight days, by a record 1.25 percent. If my crystal ball is accurate, I expect another .5 percent drop sometime later this year. Savers are actually losers, then, because interest rates are low and inflation is high. So urging people to save money isn't rich advice, either.

Finally, the S&P stood at 1,352.99 in March 2008, which is below its mark of 1,362.80 in April of 1999. So much for the advice of investing for the long term in a well-diversified portfolio of mutual funds -- that's also not rich advice.

Warren Buffett has said that diversification is for people who don't know what they're doing. And my rich dad once told me, "Diversifying is like going to a horse race and betting on every horse. The only way you win is if the darkest of dark horses wins." So my concern is that people who follow this second type of financial advice may actually wind up poor in the long term."

FOCUS

Robert has found that the best way for him to get ahead is to focus. He uses the acronym, FOCUS= Follow One Course Until Successful.

I agree with Robert, and I disagree with investing in mutual funds as suggested by most financial advisers. The reason people invest in mutual funds is because they don’t know enough about any one industry or market to make a good decision. They don’t have a proven system to make their investment decisions with, and therefore all they can do is spread their money around and hope for an average return.

It’s not that diversification is a bad thing. It’s just not as good as investing in your own system or your own business that you have developed and has historically beat the market.  Investing in your own business where you have control and a deep understanding of the market is better than diversifying into other markets that you know little about.

Robert’s advice to create a system that produces a positive cash-flow is the cornerstone of his legacy and the best advice he could give. He believes that the tax advantages of real-estate provide him leverage to create a system of cash-flow, but acknowledges that everyone needs to find their own system.

I realize that my position is based on my entrepreneur spirit and the fact that I don't have millions to invest, which leads me to believe that the answer to this questions is perhaps personal and situational. Call me paranoid if you wish, but I don't invest in anything unless I know a lot about the industry and the business - which leaves me with very few choices.

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Why We Want You To Be Rich

Two to the most successful entrepreneurs’ in history, bring a message of investing to win. With question and answers that explain how they did it and how you can to. They see America facing huge financial problems that the government cannot handle. This book will encourage you to get involve in your personal finances and find a strategy that works for you.

Multiple Streams of Income

Robert Allen captivates the three primary income sources and explains how you can get involved in them. This is a great book to help you find new ideas and opportunities. The primary idea Robert focuses on is finding residual income - future income off past efforts. The book is full of ideas.

Blue Ocean Strategy: How to Create Uncontested Market Space and Make Competition Irrelevant

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The Millionaire Next Door

This book is a study of the America millionaires. The results tell that most millionaires are hard working people, as eighty percent of America's millionaires are first-generation rich. They became millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way. The conclusion is that anyone can do it, with planning and determination.