I Lost 30,000$ Opportunity, Due To This One Mistake.

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This was back when I started investing, I had a small capital amount of 1k dollars. Instead of choosing to diversify the capital, I choose to invest in one single company.

Outliers -Jeeva

Disclaimer: Ya i know reading disclaimers is boring, i hate it as much as you do. but it’s important so here it goes: This content is only for educational purposes, none of the information below should be construed as investment advice.

See it’s that simple moving onto the topic:

Diversifying your investments into different assets is very important, because Diversification and Averaging(will talk about that some other day)are two most important ways to mitigate risk and maximise return.

Portfolio diversification and its importance.

Let us understand this using a hypothetical example:

  • Let us say if you have $10k and invest 1k each in 10 companies, over time some of them might fail and some of them will succeed.
  • Let us say If 50% of them were to fail and the other 50% were to succeed.

In the losing case You only lose what you have invested, to be more precise 100% of what you have invested.

To keep it simple a stock can only go 100% to the downside, but it has infinite upside potential.

  • So if you lost 50% of the capital and gained let us say 25x on the other investments an average of 5x on each company.
  • Then your total investment amount multiplied by 25x is?,
  • 5k×25=125k.
  • Then your loss which is 5k, Subtract it from the returns.
  • which is 125k-5k=120K
  • So you lost approx 5k which is 4% loss on you return, and gained 24x on your investment.

If you didn’t diversify then you would have lost 100% of your capital in one investment. but instead if you choose to diversify you didn’t just gain more profit but also you have decreased your overall losses in the end.

So what we learned here is the most important lesson in long term investing, portfolio diversification mitigates risks and increases your chances of getting good returns(when you invest into right companies).

As the saying goes, Never put all your eggs in one basket.

There isn’t any successful investor in this world who didn’t make any bad investments, every single one of them had losers in their portfolio, but what made them successful Is those winners that outperformed and gave great returns, which shadowed their losers.

I knew this when I started out in my trading and investment journey, but due to the small capital amount, I thought investing in one company would be a better choice as I didn’t want to lose out on an opportunity.

I was thinking the other way around if my investment went right, I would have made a significant amount of money. Then I can choose to diversify my portfolio, that was the plan.

Though my investment did well I got 2X return, but instead if I choose to diversify my capital into multiple companies that I selected, I would have made a 30X ROI.

Thus I understood the significance of diversification! Not just in mitigating risk but also in increasing the overall profitability of a portfolio.

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