It helps to recall a little bit of market history. In 1992, the special situation value stocks was the place to be, in 1993 and 1994, IPO were doing well, and from 1995-97, debt wasthe preferred asset class. During the past four years, with decline in interest rates and significant gain from growth stocks, value stocks and smaller-cap names have been biting the dust. Even within the BSE 30 or BSE 100, S&P CNX 50, the largest, most growth-oriented stocks, mainly the FMCG and pharma majors, have dominated the rest. During 1998, of the 30 stocks of BSE Sensex, only 8 companies posted a positive gain.

And all the eight gainers were FMCG, pharma or infotech companies. With numbers like that, it certainly is tempting to pile into these stocks only - as most fund managers are doing today. So much so, that there are now five sector funds focussed on FMCG, pharma and infotech stocks. But it is not unusual for one asset class or investment style to dominate for few years. In fact, while these sectors are the indisputable current leaders, large cyclical stocks, small stocks, and real estate have all enjoyed such periods of superior performance at one point or another.

When an asset classachieves short-term dominance, investors often believe that a long-term trend has been established and overweight the asset class. But drastic allocation moves can be dangerous. An investor who managed to concentrate in the best-performing asset class would of course achieve superior performance.

But that would be quite a feat-there's no guarantee one year's winner will be in first place the following year. But don't despair! It isn't necessary to identify the best-performing asset class each year. A strategy of simple diversification can provide good returns with low volatility.

A broadly diversified portfolio across sectors, capitalisation and style is guaranteed never to be the best in any one year-but it will also never be the worst. Such a portfolio will show fewer negative years than any concentrated portfolio.

Investors who seek long-term financial success should own a broadly diversified portfolio consisting of multiple asset classes. To be a candidate for a diversified portfolio, an asset classshould represent a significant segment of the India's corporate wealth and be investable.By diversifying, you'll avoid extremes, and find a happy medium. Keep in mind that in any given year, your portfolio's returns may significantly differ from benchmarks such as the Sensex, or S&P CNX 500. However, over the long-term, you are more likely to meet your goals by adhering to a consistent strategy of diversification.

It is tempting to concentrate in the face of short-term outperformance, and large-cap growth stocks certainly are attractive right now. But if we heed to the lessons of history, these stocks may be on the brink of a fall. A diversified portfolio makes as much sense as ever.

--Value Research