As one's net worth gets larger, lowering the risk of bad outcomes becomes more relevant and important. For example, if you have retired with $2 million assets, you want to avoid the outcome of your assets being halved to $1 million (due to market crashes etc).
In lowering risk of bad outcomes in markets, diversification becomes very important.
The book, Stock Market Maestros (by Lee Freeman Shor), profiled serveral fund managers.
Greg Padilla generally invest 2% to 2.5% in a new investment. Once invested, he rarely add on to his position. By not adding to his position, it avoid turing a minor mistake into a big mistake if the price tanks.
John Barr had sold a stock when it is down 70%. This happened more than once. However, each position is only 0.35% of his portfolio. Thus, the potential loss of any one position is much smaller, compared to a person having a 2% or bigger position.
Seperately Joe Wiggins has a post: Nothing in Investing is 'Doing Nothing', noting his thoughts on Hendrik Bessembinder's recent paper. (I recommend reading the full article; it's very thought-provoking.)
The post notes: rebalancing and concentration are about trade-offs: rebalancing works because it prevents concentration from building, while a market cap approach works because it allows concentration to develop. The “right” amount of concentration is unknowable in advance, but the more concentrated your approach, the wider the range of outcomes you need to be prepared for.
More concentration implies less diversification. Concentration implies wider rage of outcomes ie higher probability of good returns and higher probability of bad returns. So, there's a trade-off.
