The Bogleheads' Guide to Investing, 2nd Edition

Chapter Twelve Diversification

Diversification is a protection against ignorance.

—Warren Buffett

When it comes to investing, the old saying, “Don’t put all your eggs in one basket,” definitely applies. Consider the fate of many now-poor employees who had most or all of their retirement plans invested in the high-flying stock of their former employers, such as WorldCom, Enron, or any one of the many others that have gone bankrupt. Not only did these employees lose their retirement money, they also lost their jobs.

Remember the dot.com mania? At the height of the craze, many investors were reveling in their newfound paper wealth after having invested every penny they could get their hands on in the latest hot dot.com stock that just “couldn’t fail.” Nevertheless, most of them did eventually fail. Most of these dot.com investors considered it to be the fastest road to early retirement. For a few, it was; but for most of them, it turned out to a very expensive lesson in diversification, or rather, the lack thereof. So, instead of the hoped-for early retirement, many of those undiversified dot.com investors now find themselves having to work well beyond their planned retirement age.

We need to keep the dot.com mania in mind when handling our own investments. There will probably be times when you might be tempted to risk it all and swing for the fences on one or another sure thing. So, if you’re ever tempted, remember that some of the companies that imploded were considered to be ...