Warren Buffett once blasted diversification for professional investors — here's why he might be wrong

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The Oracle of Omaha resists diversifying stocks for the sake of diversifying. Buffett’s portfolio, held in Berkshire Hathaway’s account, is notoriously concentrated in only a handful of stocks.

While many investors look to Buffett for advice on the financial markets, for those in lower income tax brackets than the billionaire, it might not be the best strategy for their investments.

Aside from his savvy investment decisions, Warren Buffett is known for making some of the most colorful analogies in the finance industry.

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He once used NBA star LeBron James as an analogy for why professional investors shouldn’t focus too much on diversification.

"If it's your game, diversification doesn't make sense,” he said. “If you have Lebron James on your team, don't take him out of the game just to make room for someone else… It's crazy to put money into your 20th choice rather than your first choice.”

With the whirlwind markets have been experiencing, it’s important to understand how diversification can mitigate such risk.

The value of diversification

For everyday investors, Buffett believes the best approach is a well-diversified passive index fund. Vanguard S&P 500 ETFs, for instance, track the performance of the underlying index and have delivered an attractive 14% compounded annual growth rate since its inception in 2010. That’s a decent return with minimal effort.

“Diversification is a protection against ignorance,” Buffett said. “If you want to make sure that nothing bad happens to you relative to the market… There's nothing wrong with that.”

For the average investor, who likely has other employment that leaves little time (or energy) for such in-depth stock analysis, it’s important to get your info from reliable resources, just as Buffett does.

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A diversified portfolio also allows you to take advantage of small rises in the value of your investments and shift more funds to growing stocks. If you want to diversify your portfolio, finding an investment platform you can trust is important. And there are solid options available whether you want to make trades yourself or take a more automated approach.

With Robinhood’s investing app, you can easily buy and trade stocks, options, exchange-traded funds (ETFs), cryptocurrencies.

Robinhood doesn’t charge a commission to trade stocks and you can buy fractional shares, allowing you to invest the way you want to, without pesky extra fees.

With features like automatic investing, in-app investing guides and 24/7 access to their customer service team, Robinhood makes it easy to diversify your portfolio with stocks whose earning potential might grow over time.

And if you want a more set it and forget it experience, with Acorns — an automated investing and saving platform — you can work on diversification without a second thought.

All you have to do is link your bank account to the app and spend as you normally would.

Acorns automatically rounds up the price to the nearest dollar and deposits the difference into a smart investment portfolio, allowing you to grow your wealth without even thinking about it.

Acorns’ expert-designed smart portfolios include a mix of different ETFs with exposure to thousands of stocks and bonds, ensuring your investment is spread across a diverse list of sectors like information technology, healthcare and energy.

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Buffett’s diversification of his investments doesn’t end with stocks and artworks. He also owns a wide range of other businesses, privately, inside the Berkshire Hathaway corporation. The portfolio of private companies under this umbrella ranges from energy giants and insurance providers to candy factories and furniture makers.

Altogether, Buffett is actually quite well-diversified, and he recommends diversification for the ordinary investor, too.

Read more: Rich, young Americans are ditching stocks — here are the alternative assets they're banking on instead

Buffett’s concentrated bets

Professional investors like Buffett have dedicated their lives to the stock game. They also have immense resources in the form of multinational corporations and an army of young, talented analysts working to assist them.

A jaw-dropping 50.19% of Buffett’s portfolio in 2023 was dedicated to just one stock: Apple. The top three stocks — Apple, American Express and Bank of America — account for 68% of the total value of the portfolio. By the end of 2023, the multinational conglomerate holding company held just 41 stocks altogether, and many of these were less than 1% of the portfolio.

Some money moguls consider that Buffett is over-invested in single stocks, and advocate greater diversification to the average investor to help their portfolios weather changes in the market. If you’re looking to diversify your portfolio beyond the stock market, investing in real estate is a natural choice.

If you’re looking to make a larger investment in the market, you should consider investing in commercial real estate. Commercial real estate has a long history of adding stability to your portfolio and outperforming the S&P 500 over a 25-year period.

First National Realty Partners (FNRP) allows accredited investors to invest in shares of grocery-anchored commercial real estate leased by national brands like Whole Foods and Walmart. These properties are essential to local communities and are likely to remain stable.

To get started, all you have to do is fill in some information about yourself, your income and your investment goals. With the potential to earn a quarterly income, you can sit back and enjoy the benefits of commercial real estate while FNRP’s team of experts manages the entire lifecycle for you.

If you’re not an accredited investor, crowdfunding platforms like Arrived allow you to enter the real estate market for as little as $100. Arrived offers you access to shares of SEC-qualified investments in rental homes and vacation rentals, curated and vetted for their appreciation and income potential.

Backed by world-class investors like Jeff Bezos, Arrived makes it easy to fit these properties into your investment portfolio regardless of your income level. Their flexible investment amounts and simplified process allows accredited and non-accredited investors to take advantage of this inflation-hedging asset class without any extra work on your part.

Another sound move that the rich make to diversify their portfolios is investing in fine art. Fine art is about more than just a pretty picture on the wall — it’s a way of diversifying your portfolio, and it can now be done by purchasing fractional shares.

With Masterworks, you can now invest in artwork by iconic artists from Banksy to Basquiat. Masterworks’ online platform allows you to invest in fractional shares of famous artwork, without paying auction prices. As calculated by the Masterworks All Art Index, from 1995-2021 contemporary art prices outpaced the S&P 500 by 131%.

To begin investing in art, simply browse through the pieces in their portfolio and choose how many shares you’d like to buy. Masterworks will take care of the rest — making elite art investments accessible and hassle-free.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.

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