In the world of investing, many retail investors often fall into the trap of putting all their eggs in one basket. This mindset reflects not only a misunderstanding of risk management but also a feeling of helplessness when facing market volatility. Take, for example, a colleague of mine at the office. He invested millions of dollars in a single stock, only to be stuck with it for years. The frustration and anxiety he experienced during this period were palpable.

However, when the market showed signs of recovery in September of this year, he finally managed to sell the stock at a profit. I suggested he consider diversifying his investments going forward—perhaps building a balanced portfolio to better navigate uncertainty. He readily agreed. Yet, the outcome was both amusing and exasperating: he went from one stock to two, and proudly called it “diversification.” Needless to say, it was an eye-opening moment.

Why Do Retail Investors Favor Single-Stock Bets?

Why are so many retail investors so reluctant to diversify? The most common reason I hear is, “There are too many stocks to manage.” But here’s a simple question: does a stock really require your constant attention? Whether you check your trading app every day or not, a stock will go up or down according to its own logic, which is largely independent of your habits or trading actions.

Holding a single stock is like entering an arranged marriage without knowing anything about your partner’s background. You’re left in the dark about how it will perform. Now, if you owned ten stocks, the situation is still somewhat blind, but you would have spread your risk. The odds of selecting a good company are higher with multiple options, even though the process still requires a bit of luck.

The core issue here is that short-term thinking often drives this behavior. Investors who constantly monitor minute-by-minute stock movements and are ready to act at a moment’s notice find it cumbersome to manage multiple holdings. The slightest distraction can derail their short-term trading plans or disrupt their strategy of buying and selling at precise moments.

The Case for Diversification, Even with Limited Capital

Some may argue that smaller portfolios shouldn’t be diversified, but I believe the opposite is true: the smaller your capital, the more important it is to focus on safety. For instance, if I had a capital of just $10,000, I would likely spread it across five stocks in unrelated industries, balancing the risk and creating a relatively stable investment portfolio.

Even with just $1,000, I would advise against limiting oneself to individual stocks. Instead, options like index funds or convertible bonds may offer a more stable and predictable return. After conducting thorough research, one can see that these types of investments often outperform individual stocks in terms of both stability and certainty.

For the average person, money doesn’t come easily. Every dollar is hard-earned, and it’s wise to approach investing cautiously. Investing in what you know and diversifying your holdings, even if you have a small amount to invest, is a smarter and more effective approach to building wealth.

The Argument for Concentrated Investing

Of course, concentrated investing isn’t a concept foreign to the world of investing. Some of the most successful investors—such as Warren Buffett, Peter Lynch, and Philip Fisher—have made compelling arguments for focusing on a few high-quality stocks. They often use their personal success stories to advocate for making concentrated bets on a select number of stocks rather than spreading capital thin across many.

However, concentrated investing comes with an important caveat: it assumes that you have the ability to thoroughly research and understand each stock in-depth. For most retail investors, the “circle of competence” is quite limited, meaning they may not possess the same level of expertise or resources that these legendary investors had when they made their successful concentrated bets. Most retail investors, and even many self-proclaimed market experts, don’t have the time or the expertise for such in-depth research.

Even the masters of concentrated investing don’t necessarily hold just a handful of stocks. In reality, their portfolios typically contain a moderate amount of diversification. Concentrated investing doesn’t imply that you should only hold five stocks—many seasoned investors find that a portfolio of five to ten stocks provides a good balance between risk and potential reward.

Why Diversification is Key to Avoiding Painful Losses

Ultimately, retail investors need to realize that investing is not a high-stakes gamble, but rather a discipline that requires patience and a strategic mindset. In an unpredictable market, diversification is one of the most effective strategies for managing risk. Before you rush to pick a stock, take the time to assess your own risk tolerance and think about how you can spread your investments to minimize potential losses.

Remember, for the average person, every dollar invested matters. It’s important to avoid chasing unrealistic short-term gains and instead focus on steady, long-term growth. Though the investment process may involve some pain and discomfort, a well-thought-out, diversified strategy will help you stay on track and ultimately enjoy the rewards of your efforts.

So, from now on, forget the single-stock mentality. Diversifying your investments isn’t just a prudent choice—it’s the intelligent approach to safeguarding your financial future and maximizing your potential for success.