Conventional Not-So-Wise-Dom

My biggest financial blunder was listening to conventional wisdom about diversification.

Many years ago, I was living in Austin, Texas, where Dell was based. Dell was growing like gangbusters and was about to go public. Meanwhile, my portfolio was already heavily weighted with shares of Compaq Computer, which was performing well for me. I heeded the old adage to not have too much money in a single industry, so I passed on the Dell shares. I could have made many times my initial investment in it, had I bought some shares.

I learned it’s more important to invest in businesses you’re very familiar with than to blindly follow conventional wisdom. — J.R., Austin, Texas

The Fool Responds: The conventional wisdom isn’t that silly, as plenty of industries have been hit hard at various times. The airline industry, for example, could get whacked by soaring fuel prices, while pharmaceutical companies might suffer if some reform limits how high they can set prices. If you were that excited about Dell and also wanted to remain invested in Compaq, you might have sold half your Compaq shares and put that money into Dell.

It’s also worth noting that investing in initial public offerings (IPOs) can be tricky, and it’s often best to wait a year or so for the stock to settle down. Usually only the most connected investors get the actual initial shares, with others buying at higher prices.