‘A protection against ignorance’: Warren Buffett once blasted diversification for professional investors, says it’s ‘crazy to own 50 stocks’ — here's why he might be wrong

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

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.”

However, the recent $6.4 trillion global stock wipeout and fears of a prolonged downturn underscore the risk of having a heavily concentrated portfolio. As some traders fear the “great unwind” is just starting, 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.

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.