By Jason Zweig

If you need to ask whether you have too much money in one investment, the answer is yes.

Even after the latest bout of tariff turmoil, stocks have mostly recovered their April losses. So readers, friends and family are asking me questions like: Is it a bad idea to have 85% of my portfolio in Nvidia? Should I own some other stocks besides Apple? If bitcoin is 90% of my assets, should I scale back?

For something like 99.95% of people, the answer is yes.

Warren Buffett and his late partner, Charlie Munger, have repeatedly said that diversification -- spreading your bets across many stocks rather than focusing on a few -- makes sense for most investors. Of course, they've also said, that doesn't apply to those with superior skills or knowledge, like themselves.

The problem is we all think we have superior skills when most of us don't. Even ostensibly sophisticated investors can fall into that trap. Just look at how some private foundations manage their money.

About 10% of the roughly 300 such organizations in the U.S. with more than $500 million in assets have at least 30% of their portfolio in a single stock, according to John Seitz, chief executive of FoundationMark, a firm that tracks the investment performance of private foundations. More than a dozen have at least 75% in only one stock.

So you're not alone if you've got most or all of your money riding on a single concentrated bet. That can happen not only to skilled investors, but to anyone who has the good fortune to buy an asset that goes on to have spectacular returns.

Few stocks have performed better in recent years than Nvidia. Consider what's happened at the Jen-Hsun & Lori Huang Foundation, created by Nvidia's founder and CEO, Jensen Huang, and his wife. As of Dec. 31, 2019, its assets consisted of $378 million in Nvidia stock.

Over the four years through the end of 2023, the Huang foundation's assets exploded to $3.4 billion, even after paying out more than $170 million in grants, according to tax filings. That was thanks mainly to Nvidia's otherworldly return of 745% over that period.

Or take the Lilly Endowment. As of Dec. 31, 2023, the latest available tax filing, it held $62.2 billion in total assets -- with $58.2 billion, or 94%, in shares of Eli Lilly, maker of the blockbuster weight-loss drug Zepbound. Eli Lilly is up substantially since then, so Seitz estimates the foundation's stake at $68.8 billion.

Many other private charities whose assets once consisted primarily of a single stock, including the Ford, Gates and Kresge foundations, have gone on to spread their investment bets more widely. Do the Huang and Lilly foundations have any plans to diversify their holdings? Spokespeople for the two organizations declined to comment.

But investors of all sizes should remember an old maxim: Diversification is the best course of action at the very moment when it feels like the worst.

Over the 10 years ended Dec. 31, 2019, VF Corp., which makes clothing and footwear, generated a stellar 21.9% annualized return, far outpacing the S&P 500's 13.6% average growth over the same period.

At that point, the investment portfolio of the J.E. Barbey 8 FBO Tenacre Foundation consisted almost entirely of VF shares. Its assets totaled $3.3 billion, with $3.1 billion in VF alone.

Then VF's stock unraveled, losing about 78% by year-end 2023.

I wasn't able to reach anyone at Barbey for comment. But such a decline is far from unusual.

Back in early 2000, Cisco Systems was the Nvidia of its era, the nimble giant whose routers and other hardware would build the backbone of the booming World Wide Web.

On March 27, 2000, Cisco surpassed Microsoft to become the world's most-valuable company. At that point, it had a total market value of $555 billion, as the stock hit what was then an all-time high of $80.06.

More than a quarter of a century later, that's still Cisco's all-time high. The stock remains more than 20% below where it stood more than 25 years ago.

And no wonder: In early 2000, investors paid nearly 190 times Cisco's previous 12 months of earnings to buy the stock.

Doubling down on a stock when it's at a peak is an especially bad idea because remarkably few companies turn out to be long-term winners.

Of the more than 28,000 U.S. stocks whose returns can be tracked between 1926 and 2022, nearly 59% earned less than U.S. Treasury bills over their full histories, according to research by Hendrik Bessembinder, a finance professor at Arizona State University. All the stock market's excess return over cash has come from fewer than 4% of the companies.

So, yes, if you're as good a stock picker as Warren Buffett, you absolutely should concentrate on only a handful of companies. And, yes, if you're as brilliant a CEO as Jensen Huang, you should bet big on yourself and your company.

The rest of us should diversify -- especially when it seems like a bad idea. The bigger your recent gain and the more counterintuitive diversification feels, the more vital it will turn out to be.

Write to Jason Zweig at intelligentinvestor@wsj.com

(END) Dow Jones Newswires

May 23, 2025 11:00 ET (15:00 GMT)

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