Hi there,
The official reason to diversify is to limit unsystematic risk - that is risk associated with a specific stock or industry. By diversifying into several stocks/industries, you are limiting the risk any one stock or industry has on your portfolio. It is a pretty straightforward concept and one that we fully support. The questions then becomes when and how much should one diversify? This is a little trickier to answer.
Research has showed that the benefits of diversification top out around 26-28 stocks. Although every stock added after that does have a benefit, it is negligible. In other words, if you hold 50 stocks just because you want to diversify, then it is likely not having as big of an impact as you think. That isn't to say you can't hold 50 - i hold around 35 - it simply means don't hold that many JUST because you want to diversify. On the flip side, I've seen well diversified portfolios with 10 blue chip stocks. Although the risk of having a catastrophic event happen to one of those 10 is low, it can happen. Prime example - General Electric (GE) was long considered a blue chip stock until it wasn't. That would be a pretty big hit to one's portfolio if GE accounted for 10% of holdings. Worth noting - so too was Blackberry (BB) at one point.
In terms of when should one diversify, this is a more controversial one. My own personal beliefs, are that it is less important to diversify early in your investment career as you are building your portfolio and more important to diversify later in life. Young investors can afford to take more risk, and have a longer timeline in which they can rebound from losses.
In the early stages of my investment career, I spent more time just building positions in stocks I thought provided good value and upside and less time worrying about diversification. My portfolio is not yet balanced, but in recent years have made more of a concerted effort to diversify. However, I will not diversify at any cost. I still need to find value/growth in the stocks I buy and if I believe the stock (or industry) to be too expensive, than I will pass and invest in something else.
Hope that helps,
Mat
For those at or near retirement, it