Diversifying risk isn’t the same as straight diversification, so much so that diversifying risk can actually be achieved through an investment in only one company. It all comes down to how well spread any risks to your investment are. For example if you invest in a global company that operates several different contracts and product lines around the world that company is diversifying your risk for you. If one contract or even one product goes pear shaped you still have protection in the form of the other business lines.
A big question is how important this really is. Should it be one of the big things you should attempt to achieve with an investment or should you not worry too much about it? This isn’t really a question with a yes or no answer, you see there are some companies that sell a single product, which have built what is effectively a fortress around their product so that it is so well established that it cannot be displaced from that market except in exceedingly exceptional circumstances. However, companies like these are not that common and if there is risk then it pays to have diversified risk because the one thing you cannot be sure of is that nothing will go wrong.
There are many companies that do have diversified risk built in, so this is not really a problem, and for those that don’t have diversified risk, combining even just five can solve your problem. What you are trying to avoid is having all your companies relying on one revenue stream, be it properties, government sources or one type of product in one consumer market.
Unless you have already diversified risk then, unless you have exceptional companies, it is vital to do so, but it really all just comes down to whether if one parameter goes against you, will the whole house of cards come crashing down? If the chance of one parameter going against you is 5 percent then that’s fairly high, but if you need five different parameters at 5 percent to go against you to cause you problems then the odds against you improve to 0.0000003125 percent, which demonstrates just how easy it is to improve your position by spreading the risk so it doesn’t rely on one parameter. By ensuring that 5 things need to go wrong that risk is effectively negated even though each parameter has a 5 percent chance of happening.