Diversification, Schmiversification
Steve Smith, 23, recently out of college, has just won $15 million in the lottery. After buying a few things, he realizes that he still has quite a bit of money, and starts to look at the big picture and what he should do. After his girlfriend shoots down his dreams of buying an island paradise where he could relax and golf all day, or buying his own rocket ship, Steve is forced to think of more practical things to do with his newly acquired fortune. Unable to find a way to spend it all, Steve decides to save and invest most of his winnings. He begins searching financial magazines and the internet for the best way to build his capital.
Steve faces an issue that many investors today face?not a pessimistic girlfriend, but rather how he should invest his money. In his research, Steve has found that there is a commonly accepted investment style that is focused on diversification of risk. Risk in terms of investing is based on the possibility of losing your money. For example, stocks are higher-risk investments where government bonds are considered lower risk, because stocks are shares of ownership to a certain company, which could see hardships at any given time, while government bonds are guaranteed by the country's treasury to ensure that the investor is paid when the bond is due.
While he was doing all this searching, Steve remembered the time he was going to a Hawaiian party in college, and his searching for clothing ideas from his idol, Jimmy Buffett. In his online search, he came across some other Buffett, named Warren, who he remembers be deemed some "investment guru." Before he decides to do anything w ...