Concentration or diversification – which makes better investments

Common wisdom seems to suggest that you should diversify your investments.

But is this correct?

In my opinion, it is wrong. In fact, I remember reading Napoleon Hill’s great book Think and Grow Rich many years ago where he also said that successful people specialise in one area they don’t diversify.

On the other hand, you will find many financial planners telling you to diversify.

Averageness

In my mind, this leads to averageness – bottom of the best and cream of the bottom.

In my experience, I’ve found that wealthy and successful people – be they a business person, entrepreneur or investor – have one thing in common, they specialise.

They all focus their concentration on one single earning activity.

They eventually became exceptional in that one activity by continuously improving their skills and increasing their knowledge in that one activity.

Despite the myth going round that it is good to have multiple streams of income the wealthy very rarely engaged in multiple earning activities.

I remember one astute colleague telling me “If I try to do five things to earn money, I will lose money in all five things. So I focus on doing one thing really well.”

First they concentrate, then they reinvest

They kept building their asset base so that it would one day provides them “unearned income” – income they do not have to work for. Another thing the successful people all had in common was that they reinvested the money they “earned” from that one activity into passive investments – most often real estate.

The lesson from this is to specialise and concentrate your activities on something you can become good at.

Then invest your income into high-growth assets building your asset base until you have your own cash machine.

You will never become wealthy by working for your money; you can only become wealthy if your money works for you while you’re asleep.