Most people do not own individual businesses. They own mutual funds or retirement accounts filled with hundreds of companies they cannot even name. They are told this makes them diversified and therefore less risky. In reality, it means they are ignorant of what they actually own. To me, that is more risky.

The S&P 500 index is a great example. The S&P 500 index represents the stock performance of 500 leading U.S. companies. An S&P 500 ETF is a solid choice if you want to be a lazy investor. At least you know you are invested in America’s largest businesses. But here is the truth. The S&P 500 only outperforms inflation about 75 % of the time. In about 25 % of years, it fails to keep pace with rising prices (Quantified Strategies). Most of the real returns come from a small handful of the largest companies. That may look diversified on the surface, but in practice your results depend heavily on just a few.

The real danger is believing that diversification automatically protects you. Warren Buffett has said for years that diversification makes sense if you do not know what you are doing. His success was built on conviction, not owning everything. He spent the time to understand a business deeply before investing, which gave him the confidence to concentrate rather than spread thin.

True investing is not about owning hundreds of companies. It is about knowing what you own and why.

And let us be honest. Even the so-called “low risk” parts of diversified portfolios, like bonds, have underperformed badly. In 2022, the Bloomberg U.S. Aggregate Bond Index lost about 15%, its worst year on record. For something sold as low risk, that kind of loss is a wake-up call. Owning assets you do not understand, or assuming they are safe just because they are common, can be far riskier than a concentrated portfolio you actually know.