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Key Takeaways
- In contrast to most financial advisors, Munger called wide diversification “protection against ignorance,” useful only when you don’t have conviction.
- Holding too many positions, he argued, can raise costs, blunt big winners, and still leave you exposed to market shocks.
- Munger advocated a balanced approach—owning a few great companies plus low-cost index funds—that can capture upside without unnecessary clutter.
- But he said “know-nothing” investors—which is most people—should rely on broad market index funds.
Diversification is almost a sacred word when it comes to investing, but the late Charlie Munger—Warren Buffett’s longtime partner at Berkshire Hathaway—argued that some investors should avoid it completely.
Munger said spreading money across scores of holdings can quietly dilute returns and distract investors from focusing on their best ideas. His take-home message: If you truly understand just a handful of businesses, a sprawling portfolio may do more harm than good.
What Charlie Munger Said About Diversification
“Diversification is for those who don’t know anything,” Munger told shareholders. “If you are capable of figuring out something that will work better, you’re just hurting yourself looking for 50 [stocks] when three will suffice—hell, one will suffice if you do it right.”
Munger’s position rests on two main ideas:
- First, true bargains are rare: spreading capital across dozens of “pretty good” names dilutes the gains from your best insights.
- Second, concentration forces discipline: you dig deeper, understand risks better, and can act decisively when opportunity knocks.
That said, Munger was quick to add a qualifier: most people are actually “know-nothing” investors and should thus default to broad market index funds rather than gamble on a half-researched stock list.
Pros and Cons of Diversifying Your Portfolio
Striking the right balance often comes down to skill and temperament. Seasoned and skilled stock-pickers with a well-documented edge may prefer five to 15 high-conviction names. But everyone else might hold a couple of broad index funds plus a small “satellite” sleeve for ideas they’ve studied in depth.
Pros and Cons of Diversifying Your Portfolio
Pros
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Risk reduction: Mixing asset classes, sectors, and geographies can help smooth out the impact of any single downturn.
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Behavioral guardrail: A diversified basket can keep emotions in check, making it easier to stay invested through volatility.
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Easy access: Low-cost and tax-efficient index ETFs make diversification easy and accessible.
Cons
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Return dilution: Over-diversification means your standout winners move the needle less, capping upside.
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Complexity and cost: If you are picking your own stocks, more positions mean more monitoring, potential overlap, and higher fees or trading expenses.
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False security: A portfolio stuffed with similar large-cap U.S. stocks may look diversified but still hinge on the same macro factors.
Important
The vast majority of retail investors consistently underperform broad market benchmarks by a wide margin when picking stocks.
The Bottom Line
Munger didn’t dismiss diversification outright—he dismissed blind diversification. If you lack the time, knowledge, or desire to analyze businesses deeply, market-tracking funds offer a perfectly rational path. But if you truly understand a company’s economics and risk profile, don’t let dogma force you into dozens of filler positions. In Munger’s words, “One will suffice if you do it right.” The real secret is knowing which camp you belong to, and investing accordingly.
