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Diversification is also the reason many portfolios under-perform, particularly in mutual funds.

If you bought oil and technology stocks, over the last three years, you would be, on-average, exactly where you started. Congratulations. While that's better than losing, the point is that the risk demands commensurate reward.

However, had you bought real estate, you would be kicking ass.

The whole reason for choosing one stock or sector over another is you are looking for exceptional performance.

The real research I would like to see is where are these sellers putting their bucks. Most may not be putting it into MMF at 1% or so. They can't all be buying real estate. No, at least my guess is they are fishing for growth markets in other companies. Dell, MSFT for example are not growth stocks to me... Biotech, Pac Rim stocks, are two choices.

Sorry to disagree, but I must. The rationale for diversification is that different asset classes act in different ways. The technical term for it is correlation factor. For example, large cap value stocks and small cap growth stocks are not perfectly correlated and will perform differently. That is why a well-diversified portfolio will hold as many as 10 different asset classes.

Since it is not possible to consistently predict which asset class will outperform in the next year, portfolios are diversified so as to own some of each. This will absolutely guarantee that the portfolio will not outperform any individual asset class during any one period, but it will guarantee that the owner of that portfolio will not get caught in the same situation that Enron or Worldcom employees were.

We can always tell each other where we should have been to make a fortune if we could go back in time. Unfortunately, my “wayback machine” is acting up.