One goal. A better life.
🎁 Special discount until January 5, 2026
“This is a masterpiece.”
—Morgan Housel, author, Psychology of Money
“Discover the extraordinary within yourself.”
—Manish Chokhani, Director, Enam Possess
I’m writing this series of letters on the art of investing, addressed to a young investor, with the aim of providing timeless wisdom and practical advice that helped me when I started. My goal is to help young investors navigate the complexities of the financial world, avoid misinformation, and harness the power of compounding by starting early with the right principles and actions. This series is part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund.
Dear young investor,
Let me take you back to the early 1970s, when there was a group of fifty specific stocks that everyone in the US loved. They were called the ‘Nifty Fifty’.
These weren’t obscure penny stocks, but titans of American industry: companies like Kodak, Polaroid and Xerox. The word on the street was that these were one-decision stocks. You just had to make the decision to buy them. You never had to sell. You never had to worry. They were considered so dominant and safe that price did not matter.
Investors put their savings into this basket, believing that nothing could go wrong.
Then the bear market of 1973 arrived.
The illusion of security was shattered and these ‘invincible’ giants were decimated. Kodak lost half its value. Polaroid eventually collapsed by 90%.
It was a brutal reminder of a fundamental law of economics that generally applies to physics and even diet. It’s that there’s no such thing as a “free lunch.”
The universe is transactional and ruthlessly demands payment for everything it gives you. If you want higher returns, which also come with the chance of bigger losses, you generally have to accept the risk of stomach upset. And if you want certainty, you have to accept a return so low that it barely covers inflation.
While I won’t bore you with the academic theories, many of which are downright broken because they assume markets are rational, there is still one free lunch in the game of wealth creation.
Barry Ritholtz explained it best:
The beauty of diversification it’s about as close to a free lunch as you can get in investing.
I prefer to think of diversification as “survival insurance.”
It’s the one time in your investing life where you can reduce the chance of a catastrophic outcome without necessarily sacrificing your ability to build wealth over decades.
I know what you’re thinking. Most investors who read Charlie Munger or Warren Buffett believe what they say about diversification, that it is “protection against ignorance” and that there is no point if you know what you are doing.
We like to quote Buffett on concentration because it confirms our greed, but we conveniently forget that Buffett also says most people should just buy an index fund and play golf.
But you have to ask yourself in all honesty: Are you Warren Buffett? Do you have a track record of 60 years, a direct line to management and the courage to see your assets halved without panicking?
For the rest of us mortals, the future is a black box, not a spreadsheet. We diversify not to reach a perfect mathematical sweet spot, but simply because we respect the fact that the world is chaotic, messy, and prone to “black swan” events that no model can predict.
Legendary financial historian Peter Bernstein said it best when he told Jason Zweig:
Diversification is… an explicit admission of ignorance. And I view diversification not only as a survival strategy, but also as an aggressive strategy, because the next windfall could come from a surprising source. I want to make sure I’m exposed to it. Someone once said, if you’re comfortable with everything you own, you’re not diversified.
Let me talk about your portfolio for a moment, because I know what it probably looks like right now. You may own five different mutual funds and feel very responsible about them because you think you are spread out and safe. But if you look deeper and see that the portfolios overlap, you are likely to notice that all five funds are heavily invested in the same usual suspects: HDFC Bank, Reliance, ICICI and Infosys. Whether you have a flexi-cap fund, an ESG fund or even a counter-fund, most top holdings are virtually identical.
It’s like eating one Thali where each bowl – the dal, the sabzi and the curry – is made only from potatoes. If the potatoes turn out to be rotten, or if you find out that you are allergic to potatoes, your entire meal is ruined.
True diversification means owning things that are unrelated. It means you have your ‘potato’ stock funds, but perhaps also a bit of gold that acts as a cooling curd when the spices get too hot, and a boring debt fund that acts as a rice base.
In the Indian market, which can be incredibly volatile and often driven by great stories, sectors can disappear for years. Look at how Infrastructure was the darling in 2007 and then destroyed wealth for a decade, or how IT goes through cycles of euphoria and despair. If you are 100% concentrated in the ‘hot’ sector of the moment, you are betting that the music will never stop.
But history tells us that the music always stops eventually. And it’s like musical chairs at a birthday party, but in the markets, when the music stops, sometimes they take away the whole floor instead of just taking away a chair.
By diversifying, you admit that you don’t know which sector, stock or fund will win next year, but you are confident that the Indian economy as a whole will grow.
The price you pay for this free lunch is psychological rather than financial. You will always hate some part of your portfolio. If the Nifty Smallcap index rises 50% in a year, your gold and large-cap funds will seem like dead weight, and you will feel a pang of envy as you look at your friends who went “all in” for the winners. You’ll feel stupid.
But in the long run, the concentrated investor is often wiped out by a single bad decision or unforeseen regulatory change, while the diversified investor continues to grow.
Before I end, I want to give you a practical guide on how to practice diversification without going too far.
You don’t have to own 50 different stocks or 10 different mutual funds. That’s what Peter Lynch called “diworsification.” At that point, instead of reducing risk, you only increase complexity and cost.
The sweet spot usually lies in simplicity:
- Investment funds: Three or four funds are usually sufficient. One for large stable companies, one for medium/small growth companies, and one for international exposure or another asset class such as debt (such as a balanced benefit fund).
- Stocks: 10 to 15 names in different sectors is sufficient. Any more than that and you won’t be able to follow them anymore.
Ultimately, the ‘Sleep Test’ is the best measure of adequate diversification.
If you can go to bed at night without checking the US markets to see if your Indian portfolio will crash by morning, you are sufficiently diversified. If you are constantly anxious, you are too focused. And if you’re bored? Well, then you’re probably doing it just right.
Remember, you’re not diversifying to get rich overnight; you diversify so that you can survive long enough to eventually become rich.
Yours,
Vishal
One goal. A better life.
🎁 Special discount until January 5, 2026
“This is a masterpiece.”
—Morgan Housel, author, Psychology of Money
“Discover the extraordinary within yourself.”
—Manish Chokhani, Director, Enam Possess
Disclaimer: This article was published as part of a joint investor education initiative between Safal Niveshak and DSP Mutual Fund. All mutual fund investors must go through a one-time KYC (Know Your Customer) process. Investors may only deal with registered investment funds (“RMF”). For more information on KYC, RMF and the procedure for filing/redressal of any complaints, please visit dspim.com/IEID. Investments in mutual funds are subject to market risks; read all fund-related documents carefully.
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