I'll come straight out and say it - I have a lot of problems with diversification.
I'm also a big believer in having a concentrated portfolio, providing you've done your homework and chosen your investments with care.
Gasp! Problems with diversification? A concentrated portfolio? Everyone knows you MUST diversify! How can you say such reckless and irresponsible things?
I've said a lot already elsewhere on this site about why I don't like diversification, at least how diversification is often promoted by self-serving industries that provide products that may break up your investments into very small pieces but which don't actually provide much protection or improve your results.
But to summarize the problems with diversification:
There are intelligent ways to diversify, even when it comes to option trading, but for many people, the number one rule of investing is to always be diversified.
For me, the number one rule of investing is to invest in individual high quality businesses (and number two is to pay as little for those investments as possible, either through rigorous value investing patience, or through strategic option strategies that produce value investing like results).
A concentrated portfolio will mean different things to different people. I'm not saying you should limit yourself to owning just three or four stocks. But, in my experience, most self-directed long term investors max out at around 20 stocks, which I believe provides more than enough diversification if you choose intelligently.
To me, a concentrated portfolio, makes a lot of sense, as long as I take responsibility for the selection and timing of my investments:
Beware conventional wisdom of all stripes - it's usually a lazy, superficial, shorthand version of the real thing that, in my opinion, is almost always more wrong than right.
And when it comes to the stock market diversification mantra, you have to ask yourself who benefits from the "need" for diversification?
Just as fund managers and financial planners are compensated by how much money they manage rather than how well they manage it (as I pointed out in When Should You Sell Your Dividend Paying Stocks?), it's no surprise that those who clamor the loudest about the supposed advantages of diversification are those with products that provide "broad diversification."
I will say this, however. I do believe there is a role for diversification and passive investing and - dare I say it? - perhaps even ETFs and mutual funds. But that role should be reserved for those who have zero interest or aptitude for managing their own investments.
Let's face it - we all have areas in our life or activities where we are totally incompetent or that bore us to tears. Mine is hanging wallpaper or going with someone to shop for fabric. If you feel the same way about investing, then yes, outsourcing that to a trusted third party is the way to go.
But don't expect above average results. And don't expect the rest of us with genuine interest and commitment to tag along.