How does diversification affect investment returns?

[weijian]

Isn't diversification the means to an end result, which is risk control?
I don't consciously build my portfolio towards diversification, but I diversify because I am scared a wrong pick wipes out a chunk of my wealth.

Hi EnSabahNur,

Let me use the ice-berg theory to illustrate better.

The ice-berg theory states that the underlying beliefs/biases (unseen) drives our behavior/actions (seen).

As you have mentioned, you diversify because you are scared of a wrong pick. The diversification is the action that came after your belief (that markets are uncertain? that you are fallible?).

My personal "self improvement" process focused on getting the underlying unseen beliefs/biases fixed, ie. what's under the ice berg. As such, I try to differentiate between the actions (above the iceberg) and what drives the actions (below the ice berg). So for example with this thought process, diversification is not my focus. The focus is on why we diversify. And if we manage to get the "why" right, the action comes naturally.

[i4value]

I am a stock picker. But I also try to have a diversified portfolio. For example I do not have 100% in one sector just because I see them as big potential. My point is that diversification is part and parcel of the stock picking risk mitigation process. Of course the other aspect of risk mitigation here is to have a strong stock picking process.

Your iceberg analogy is not ap here as all investment is about trying to figure what will happen in the future. There will always be iceberg.