Any investor who has done some research is well aware of the advice diversify [1] your investment portfolio to minimize your risk. It makes sense; we as cautious humans quickly understand the old proverb "Don't put all your eggs in one basket". But when it comes down to the dollars and cents, does investor diversification benefit the smaller investor?

At any point in our lives our investment decisions will be determined by our current risk profile. For most their risk profile changes as their life circumstances change. When we are starting out and money isn't plentiful, the risk profile may be low. Then as we move into the wealth accumulation years the levels of risk we can tolerate increase as out investment base is larger and we have a long period left to cover any losses. And as we approach the end of our working lives the risk profile may slide again as caution about the future becomes important. Due to our different needs our attitude to diversification will be different.

The problem with diversifying is that while you may limit your risk, you may limit the gains you can make as well. If all your money is in China stocks [2] and the property market has a boom you will not participate in any of these high returns.

Another problem for the small investor is the smaller pool of funds he has to play with. It would be great to have a portfolio of property, a wide range of stocks and bonds, bank deposits and investment art. But to buy into all of these areas the small investor risks having such tiny investments in each that it isn't worth the effort.

There definitely stock trading [3] examples out there of people who have specialized and reaped the benefits of that specialization; Henry ford and Bill Gates are two examples. But such successes there are numerous others who have been burned by one big bad investment wiping their portfolio.

In the end each small investor has to assess his risk profile and manage his investor diversification appropriately.