Diversification...is misunderstood and misapplied by both investment pros and non-pros alike. Let's get the diversification misunderstandings, understood.Why is diversification misunderstood as well as its benefits? We're talking fairly sophisticated mathematics here and many "financial advisors" are poor at math other than calculating their commission checks. I love math and a few years ago my daughter's respected high school asked me if I was interested in teaching statistics because I had found a mistake on a stats exam and talked with my daughter's statistics teacher. He asked me to apply to replace him. Honored that he would ask...First a quick definition. Real diversification - in our definition - is "owning the whole market". Smart investing is owning company stocks across many asset classes - and deeply within each asset class. This includes the USA, other developed countries and emerging markets. So with diversification think "across" asset classes and "within" each asset class.Another way to talk about diversification is to describe the opposite idea "concentration". Owning more of one company than it represents in the total market is concentration. Owning individual stocks is super high concentration which is high risk without a corresponding expectation of return. While diversification is our investment friend, concentration is our investment enemy.A big part of the problem is the non-stop flow of information from the mainstream financial media who sell their products and services on the basis of “betting” - concentration. They would have you believe that they can forecast price movements of stocks and of sectors. You "concentrate" your holdings in the securities they think will do well. Betting is gambling. Betting is speculating. It is not investing.At face value it makes sense. If you work at it, analyze stocks, research – why couldn’t you do better? And in most endeavors, hard work and educated guesses improves odds of success.The problem is the market is a different animal. It’s driven by news cycles, by fickle human beings, and emotion. There's a much better and less stressful path to a great result - DIVERSIFICATION - real diversification or call it "heavy diversification". Remember "across and within" as described above.We can look back on so many examples to prove that diversification is the only sane approach. What causes people to not follow a healthy version of diversification as we define it?Sometimes it is “herd mentality”. Look at the millions of people that lost money in the dot com crash. Investors who stayed diversified did fine during that time. (The dot com crash was a subset of the infamous "lost decade" mentioned below.)Sometimes it is listening to “pundits”. Warren Buffet says "own what you understand". In 401(k) plans, many people concentrate their holdings in large U.S. companies as represented by the S&P 500 index. During the "Lost Decade", 1/1/2000 to 12/31/2009, the stodgy & conservative S&P 500 lost 9.1% - that’s right -9.1% over TEN YEARS. Many people inside 401(k) plans like to place their money in large cap US funds. They "understand" large US companies. They drive by their buildings each day and purchase their products. These large US company stocks didn’t do very well for a long period – 10 years! So millions of 401k accounts did poorly over TEN YEARS. Our globally diversified portfolios earned from 54% to 79% over that ten years. We would have saved you from the mistake of concentrating your funds in the S&P 500.Sometimes it is eternal optimism. Many individuals are “hopeful” or “greedy” enough to gamble with their hard earned money – and they simply don’t view it as gambling.Sometimes it is taking a discipline like entrepreneurism or sports – and assuming the same approach will work in investing. That “informed risk-taking” and “hard work” gives you a good shot to “win” in the market. Sorry to burst your bubble. I'll say it again: The problem is the market is a different animal.Sometimes people think that a good way to diversify is to hire multiple advisors - thinking in terms that if one fails, the other will succeed. The problem is that investments of multiple advisors will likely overlap, or where they both do not cover the entire market - and that creates concentration where they overlap and they don't cover the entire market - both are the enemies of diversification.Yes, it is possible to do well with informed risk-taking – or placing bets. However, a very high percentage of the time it does not work – and even worse – you don’t know until it is too late. If you look at actively managed mutual funds (they place bets) and rank their performance each year – their annual ranking bounces all over the map and only one of every 4 years do they beat the index fund which falls consistently in the top 10-30%. That's because their guesses are often wrong and they are constantly searching for the elusive answer.However, we know that markets go up over the long term. Advisors who make sure that their clients experience “what the market has to offer” are in the top tier of performance rankings. Just look at the Lost Decade! Look at the dot com crash - you need look no further.It sounds boring to own the market – and in a sense it is. But getting results that beat the vast majority of folks out there is not boring - at least not to me. I love it. We delight in making sure that our clients get what the market has to offer that only a few advisors do successfully.This "own the market" approach is not only sane and valid - it is also a better experience. The pressure and stress of active management, and the lower level of diversification it represents is not worth it, even for the brief periods when you have lucked into the right mix of concentrated investments. You are always wondering and worrying, and watching the market - instead of focusing on your life - your loved ones and the other important areas of your life.