MENU

How to diversify with just one ASX stock

The Motley Fool reveals how buying one company at a discount gives you instant sharemarket diversification.

The wise tell us diversification is good.

Academics have shown that diversification delivers higher returns for a given risk. Most professional fund managers espouse the benefits of diversification.

However, some of the world’s greatest investors, like Warren Buffett, have benefited from concentrating their investments. They have outperformed markets by concentrating their investments, rather than watering down their best ideas with diversification.

Diversify or concentrate

So should individual investors concentrate or diversify their investments? I’m sorry to say the answer is, it depends. The good news is that the answer is still straightforward.

Whether you should diversify or concentrate your investments depends on your experience, and the effort and intensity you’re prepared to bring to investing.

The lower your experience the more you should diversify. The less interested you are in spending hours each day exploring businesses, the more you should diversify.

Warren Buffett estimated that means at least 98% of people should ‘extensively diversify and not trade’.

Conversely, diversification is a terrible mistake for investors willing to bring the effort, intensity and time to investing. Buffett believes enterprising investors can diversify with as few as six companies.

Let’s summarise where we’ve got to, with a quote from Buffett. “Wide diversification is only required when investors do not understand what they are doing.”

One company deliver instant diversification

Wide diversification generally means investing in index tracking funds. But what if you could diversify by buying just one company? What if, that one company gave you both diversification and a chance at beating share market indices?

Argo Investments (ASX: ARG) is such a company. The Adelaide based Argo is an investment manager with a long track record of market-beating returns. This one company delivers instant diversification and a shot at outperforming the market.

What’s even better is that Argo currently trades at a discount to its underlying assets. The majority of those assets are major Australian companies, like BHP Billiton (ASX: BHP), Westpac Banking Corporation (ASX: WBC), Telstra Corporation (ASX: TLS) and Woolworths (ASX: WOW).

Foolish bottom line

Buying shares in Argo is like buying the best Australian companies at a discount.

Conservative investors should also consider diversifying across time by dollar cost averaging into Argo while the current share market sale continues.

If you’re an enterprising investor looking for more ASX shares, look no further than this one large company we think has some serious long-term potential. Get this free special report from the Motley Fool – The Best Stock For $100 OilClick here to sign up now.

Dean Morel is The Motley Fool’s   Investment Analyst.   As an enterprising investor, Dean believes in concentration and does not own shares in Argo.   The Motley Fool has an enterprising disclosure policy.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!