What is common to these diverse looking practices? On the face of it, all these people seem to be making extremely sensible investment decisions. Save for one problem – their investment is too concentrated in one option, exposing them to the risks from lack of diversification. If for some reason, the business faces a downturn, many businessmen could run the risk of losing all that they had earned so far and redeployed into the business. This is particularly true of small sized enterprises that are closely held, that do not have an investment portfolio or a professionally managed treasury. It is also true of a number of small businesses run by individuals. Many of these wealthy individuals, who run a successful business, may be running the risk of concentrated investments, without being aware of it.

The same is true for those who invest a disproportionately huge chunk of money in buying a house, to save taxes. In many cases, the EMI is the saving that they manage, and it runs over 10 to 15 years. This would mean that out of a 30-year career, 50% of the savings is concentrated in an asset, that will generate no income for them. They also take the price risk, that the value of the property will increase. It is important to see if one can create a broad range of investments over ones working career, in a manner that risk is reduced. Such are the unknown ways in which we expose our investments to risk.

Then there are known ways in which we concentrate our investments. There are many who get very taken in by the current themes in the market – it could be technology, banks, pharma, PSUs or textiles. The truth is that there are themes playing out in the market, as different sectors and segments of the market look more attractive than the other, at a given point in time. Obviously these stocks rise so much more than the broad market. It is then too tempting to extend oneself into these sectors. Sometimes, investors can get so taken in that they tend to shift money from all other investments they have, into these sectors and segments that look so attractive. In some extreme cases, investors who made money in one stock, tend to like it so much, that they shift a large chunk to invest more in the same stock. These are some of the known ways in which portfolios are concentrated. Studies show that many small investors who indeed have a large number of stocks, tend to have some "dead" investments – those that were picked up on poor advice, gone sour and languish in the portfolios. Otherwise they have on an average about 8 stocks in which they have their money – not a very diversified portfolio.

Why should all of this be a problem? Only because they increase the risk of losing money, if the chosen investment goes bad. Diversification is the key to keeping risks balanced. It may be staid and simple, but like the homemade khichidi, its benefits are well known, well settled and quite indisputable. Good for your portfolio. Make sure that you don’t have more than 10% of your saving in any one asset – your business, your favourite theme or your favourite stock and perhaps not over 20% in your home. It can be painful when markets move up, but your wisdom will see you through when the markets move down. Moral of the story – make sure you diversify. It is the simplest way to make sure your portfolio is protected from risks it can do without.