“Don’t put all your eggs in one basket”
Many people in finance have an all or nothing mentality. While it makes good sense for professionals to become ninjas in their respective discipline, for the laymen investor, this dogmatic thinking can be very dangerous.
The professional investor who understands that their strategy goes in and out of favor is unlikely to press eject when times get tough. Warren Buffett, as an extreme example, doesn’t start looking at charts when value investing hits a rough patch. On the other hand, the retail investor, adopting this all or nothing mentality, is wholly unequipped to sit through long periods of negative excess returns.
I’m a big believer in diversifying not just across asset classes, but across strategies as well. One of the most important things to successfully implement a diversified portfolio is not to overdo it. You never want to be in a position of overexposing yourself to a strategy that has done well in the past without fully understanding its risks and limitations. On the other hand, you definitely don’t want to diworsify. I’m not suggesting you carve up your account in such a way that nothing has a material effect on the whole portfolio. It’s easier said than done, but I think investors can do themselves a big favor by thinking broadly and detaching themselves from the idea that there is one right way to invest.