Different people have different views on whether they should diversify。Warren Buffett once said that diversification doesn't make much sense if you know what you're doing。Peter Lynch, however, argues that the more stocks you own, the greater your chance of making a profit。

Diversification is more than just a number

First, diversification is more than just the number of stocks you own。For example, buying a fund that tracks the Singapore Straits Times Index (SGX: STI) will give you a stake in 30 stocks。However, for every S $1,000 invested, approximately S $454 will be invested in Singapore's three major banks, namely DBS Group (SGX: D05), OCBC Bank (SGX: O39) and UOB (SGX: U11).。In addition, about S $60 will be invested in Singapore's largest telecom operator, Singapore Telecommunications Limited (SGX: Z74) or Singtel.。

In fact, most of your money will only be invested in these four stocks, so there is no diversification。

By contrast, buying Warren Buffett's Berkshire Hathaway (NYSE: BRK.A) one share of stock will allow you to own a variety of different companies。The company has billions of dollars in businesses from a variety of sectors such as insurance, railroads (BNSF) and industrial (Lubrizol), as well as smaller businesses such as See's Candies, Brooks (running shoes) and Fruit of the Loom (underwear).。

Berkshire Hathaway also has significant equity investments, including Apple (NASDAQ: AAPL) worth about $155 billion, Bank of America (NYSE: BAC) worth about $36.8 billion, American Express (NYSE: AXP) worth nearly $34 billion, and Coca-Cola (NYSE: KO) worth nearly $24 billion, among others.。Arguably, this stock - Berkshire Hathaway - is at least equally, if not more, dispersed than the 30-stock index。However, business diversity does not guarantee security。

Diversification at different levels

Conventional wisdom holds that diversification means buying different businesses from unrelated industries or geographic regions.。

In the case of Berkshire Hathaway, Buffett plays a key role in most capital allocation decisions。He has performed well for a long time but is now 93 years old。So, while Buffett's holding company has a diverse line of business, he still plays an important role in generating excess returns for shareholders。

In fact, concentration risk is not limited to management, it may also appear in different parts of the enterprise。Size alone does not guarantee diversification。Take Apple for example。The company has a market capitalization of more than 2.$6 trillion, but it relies on a contract manufacturer, Foxconn Technologies (ticker: 2359), to make most of its products; and only one company, TSMC (ticker: TSM), to make chips for the iPhone; both TSMC and Foxconn, in turn, rely on Apple for a portion of their revenue.。

Ensure that the purpose of diversification is clear

As we delve into diversification, we should not lose sight of the goal: to reduce risk, which is where buying businesses from unrelated industries or geographic regions can go wrong.。In fact, diversifying your investments into areas you are unfamiliar with is actually increasing risk, not reducing it。

Lynch says it makes little sense to do so, and what matters is how well you know your holdings, not how many industries or regions you spread your money across。Diversify only if you want to improve your chances of finding more winners in your portfolio。

And you should always aim to learn more about new businesses and new industries。As you become more knowledgeable, you can expand your portfolio with more stocks you're familiar with, but don't exceed your budget。

Diversification is a long-term process

Never rush when investing in a new business or industry。For example, if you have been following a new company for a year, you can invest less than 1% of your portfolio in that stock; if you have been following for five years, you can invest up to 5%。You can adjust the percentage based on your risk appetite。The point of this strategy is your reference point, where you match the level of risk with the level of knowledge.。

Focus on successful results

The hallmark of a successful portfolio is a concentrated。As you diversify your investments to find more winners, the best winners will naturally stand out, thus focusing your portfolio on the right set of winner stocks。Dividend investing is perhaps one of the easiest and easiest ways to achieve this。