Letter to A Younger Investor #18: The Solely Free Lunch in Investing

One Goal. A Higher Life.

🎁 Particular Low cost till fifth Jan. 2026

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I’m scripting this collection of letters on the artwork of investing, addressed to a younger investor, with the intention to supply timeless knowledge and sensible recommendation that helped me once I was beginning out. My purpose is to assist younger buyers navigate the complexities of the monetary world, keep away from misinformation, and harness the facility of compounding by beginning early with the precise ideas and actions. This collection is a part of a joint investor schooling initiative between Safal Niveshak and DSP Mutual Fund.

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Expensive Younger Investor,

I need to take you again to the early Nineteen Seventies, when there was a gaggle of fifty particular shares that everybody liked within the US. They have been referred to as the “Nifty Fifty.”

These weren’t obscure penny shares, however titans of American trade—firms like Kodak, Polaroid, and Xerox. The narrative on the road was that these have been “one-decision” shares. You solely needed to make the choice to purchase them. You by no means needed to promote. You by no means needed to fear. They have been thought-about so dominant and secure that worth didn’t matter.

Buyers poured their life financial savings into this basket, believing nothing may go mistaken.

Then, the 1973 bear market arrived.

The phantasm of security shattered, and these “invincible” giants have been decimated. Kodak misplaced half its worth. Polaroid ultimately collapsed by 90%.

It was a brutal reminder of a elementary legislation in economics that often holds true for physics and even weight-reduction plan. It’s that there isn’t any such factor as a “free lunch.”

The universe is transactional and ruthlessly calls for a fee for every little thing it offers you. If you would like increased returns, which additionally include the excessive likelihood of upper losses, you could usually settle for stomach-churning threat. And if you need security, it’s important to settle for a yield so low it barely covers inflation.

Nonetheless, whereas I gained’t bore you with the tutorial theories, lots of that are frankly damaged as a result of they assume markets are rational, there may be nonetheless one free lunch within the recreation of wealth creation.

Barry Ritholtz defined it greatest:

The fantastic thing about diversification is it’s about as shut as you may get to a free lunch in investing.

I choose to consider diversification as “survival insurance coverage.”

It’s the solely time in your investing life the place you possibly can cut back the possibility of a catastrophic consequence with out essentially sacrificing your potential to construct wealth over a long time.

Now, I do know what you’re pondering. Most buyers who learn Charlie Munger or Warren Buffett consider what they are saying about diversification, that it’s “safety towards ignorance” and that it is senseless if you understand what you might be doing.

We love quoting Buffett on focus as a result of it validates our greed, however we conveniently overlook that Buffett additionally says most individuals ought to simply purchase an index fund and go play golf.

However it’s important to ask your self, with full honesty: Are you Warren Buffett? Do you will have a 60-year observe file, a direct line to administration, and the abdomen to look at your internet price get reduce in half with out panicking?

For the remainder of us mortals, the longer term is a black field, not a spreadsheet. We diversify to not hit some excellent mathematical candy spot, however just because we respect the truth that the world is chaotic, messy, and liable to “black swan” occasions that no mannequin can predict.

The legendary monetary historian Peter Bernstein put it greatest when he advised Jason Zweig:

Diversification is… an specific recognition of ignorance. And I view diversification not solely as a survival technique however as an aggressive technique, as a result of the following windfall would possibly come from a stunning place. I need to make sure that I’m uncovered to it. Anyone as soon as stated that in the event you’re comfy with every little thing you personal, you’re not diversified.

Let me discuss a bit about your portfolio, as a result of I do know what it most likely appears like proper now. You is likely to be holding 5 completely different mutual funds and feeling very accountable about it, pondering you might be unfold out and secure. However in the event you look deeper and see the portfolio overlap, you’ll doubtless discover that each one 5 funds are closely invested in the identical ordinary suspects: HDFC Financial institution, Reliance, ICICI, and Infosys. Whether or not you will have a flexi-cap fund, an ESG fund, or perhaps a contra fund, many of the high holdings are almost an identical.

It’s like consuming a Thali the place each single bowl—the dal, the sabzi, and the curry—is simply fabricated from potatoes. If the potatoes change into rotten, or in the event you discover out you’re allergic to potatoes, your complete meal is ruined.

Actual diversification means proudly owning issues that don’t have anything to do with one another. It means having your “potato” fairness funds, but additionally maybe somewhat gold that acts just like the cooling curd when the spices get too scorching, and a boring debt fund that acts because the rice base.

Within the Indian market, which may be extremely risky and infrequently pushed by fancy tales, sectors can vanish for years at a time. Have a look at how Infrastructure was the darling in 2007 after which destroyed wealth for a decade, or how IT goes by means of cycles of euphoria and despair. In case you are 100% concentrated within the “scorching” sector of the second, you might be betting that the music won’t ever cease.

However historical past tells us the music all the time stops ultimately. And it’s like a recreation of musical chairs at a celebration, however within the markets, when the music stops, they often take away the entire flooring as an alternative of simply taking away a chair.

By diversifying, you might be admitting that you simply don’t know which sector, shares, or funds will win subsequent 12 months, however you might be assured that the Indian economic system as an entire will develop.

Now, the value you pay for this free lunch is psychological reasonably than monetary. You’ll all the time hate a part of your portfolio. If the Nifty Smallcap index is surging 50% in a 12 months, your gold and large-cap funds will seem like lifeless weight, and you’ll really feel a pang of jealousy your pals who went “all in” on the winners. You’ll really feel silly.

However in the long term, the concentrated investor is commonly worn out by a single dangerous choice or an unexpected regulation change, whereas the diversified investor retains compounding.

Earlier than I finish, I need to go away you with a sensible information on observe diversification with out taking it too far.

You don’t want to personal 50 completely different shares or 10 completely different mutual funds. That’s what Peter Lynch referred to as “diworsification.” At that time, as an alternative of lowering threat, you might be simply rising complexity and charges.

The candy spot often lies in simplicity:

• Mutual Funds: Three or 4 funds are often sufficient. One for big secure firms, one for mid/small progress firms, and one for worldwide publicity or a special asset class like debt (like a balanced benefit fund).

• Shares: 10 to fifteen names throughout completely different industries is loads. Any greater than that, and also you gained’t be capable of maintain observe of them.

Finally, the perfect measure of satisfactory diversification is the “Sleep Check.”

When you can go to mattress at night time with out checking the US markets to see in case your India portfolio will crash by morning, you might be diversified sufficient. In case you are continuously anxious, you might be too concentrated. And if you’re bored? Effectively, then you might be most likely doing it precisely proper.

Keep in mind that you don’t diversify to get wealthy in a single day; you diversify so as to survive lengthy sufficient to get rich ultimately.

Yours,

Vishal

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One Goal. A Higher Life.

🎁 Particular Low cost till fifth Jan. 2026

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Disclaimer: This text is revealed as a part of a joint investor schooling initiative between Safal Niveshak and DSP Mutual Fund. All Mutual fund buyers need to undergo a one-time KYC (Know Your Buyer) course of. Buyers ought to deal solely with Registered Mutual Funds (‘RMF’). For more information on KYC, RMF & process to lodge/ redress any complaints, go to dspim.com/IEID. Mutual Fund investments are topic to market dangers, learn all scheme associated paperwork fastidiously.

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