You always hear about the importance of diversification. In general, that’s true. The average investor is going to be best served having a diversified portfolio. There aren’t any sure things in the world of investment. By spreading your risk across multiple investments you prevent one mistake from ruining your entire portfolio.

The other side of this philosophy is that by limiting your risk with diversification, you’re also limiting you gains. If you were to have all of your money in your best investment, then clearly you would have much better returns. The problem with that philosophy is that many of us don’t know which of are investments will perform the best. I like to think of diversification as ignorance insurance for this reason. Or, as Warren Buffett says: “Wide diversification is only required when investors do not understand what they are doing.”

I’m not saying that diversification is a bad thing. It’s just that the best returns are realized when you do the work to find the right investment and then take the large action required to make that work hugely worthwhile.