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Originally Posted by ea1776
Thanks for the post. I would argue that you *can* stay diversified with only 5 stocks and a 25% cash position. This means any one stock has <= 15% of your 401(k) capital at any given time.
I define diversification as spreading out your capital among solid investments across several *sectors*. For example, I would rather own 2 of the most quality stocks in the S&P 500 in 2 totally different sectors (tech/pharmaceutical), than an equal share of the entire S&P500 (index fund).
Your point is well taken though. With this style of investing, you would definitely want to choose investments very carefully, and do a good amount of research while you own them as well. I also believe I can afford greater risk due to my age.
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How would this strategy have protected you from selecting an Enron, Countrywide, or Bear Stearns? If you had done this you would have lost 15% of your porfolio in one hit. I don't think any amount of research or time will protect you from this risk.
If you want to diversify by sectors you could choose sector ETFs. Even that would be less risky than going with single stocks in your 401k.