Mellody's Math: With Financial Advisors, Less is More

May 30 -- The German architect Ludwig Mies van der Rohe once characterized his unique style of design with the simple, yet poignant statement, "Less is more."

Although he was referring to office and home design, I would argue the same can be said for building a stock portfolio.

Yet, my somewhat simple view appears to run counter to practices of a vast majority of today's portfolio managers, who seem to believe that when constructing a stock portfolio, there's safety in numbers.

With a portfolio potpourri, managers attempt to dampen the potentially negative effects of a lackluster performer or a languishing sector and thereby insulate themselves from being out of sync with the market.

Herein lies one of the biggest oxymorons of modern investing. While there has been an indisputable movement toward mitigating investment risk through the ownership of more and more securities, with these growing portfolios, professional fund managers are left to know less and less about their actual holdings.

In my view, this lack of in-depth, company-specific knowledge actually makes for riskier investing.

Don’t Scramble Your Eggs

So too believed Philip Fisher, an often-quoted investment sage who lived to tell tales of his experiences during the 1929 stock market crash.

In his book, Common Stocks and Uncommon Profits, he writes, "Investors have been misled, believing that putting their eggs in several baskets reduces risk. [Yet], the disadvantage of purchasing too many stocks is that it becomes impossible to watch all of the eggs in all of the different baskets."

The famed investor Warren Buffett offers his own critique of this popular phenomenon, calling diversification "a protection against ignorance." With his usual wit, he goes on to add that owning a little bit of everything is "a Noah's Ark way of investing [and] you end up with a zoo that way."

If Buffett is correct in his assertion that an investor's financial success is in direct proportion to the degree to which he understands any investment, then one has to wonder about the long-term prospects for a fund manager whose portfolio is comprised of hundreds of stocks.