Dear Ed,

There is a fair amount of sense in what Markman says but there's also a boatload of bunk.

Markman's argument boils down to these four points:

1.) Diversification doesn't do what it's supposed to.

2.) Small stocks don't perform better than big ones.

3.) Foreign stocks are not worth owning.

4.) Volatility, or short-term price fluctuation, is a poor measure of risk.

I've got no problem with Markman's even-numbered contentions. But his odd ones are as odd as odd can be.

Yes, if you'd put all your portfolio into the S&P 500 a couple years ago, or even into a single stock like Qualcomm or CMGI, you'd have humiliated anybody who had prudently spread a portfolio across a broader range of U.S. and foreign stocks and bonds and cash.

But there's nothing new about that. A diversified portfolio always has, and always will, underperform the hottest investment of the moment.

For anyone with a sustainable ability to identify the hottest investment of the moment, diversification is a mistake. But if you really believe you've got that ability, you're not just mistaken. You need to be hauled off in a straitjacket to the Institute for the Treatment of Investment Insanity.

Bob Markman is convinced that big technology companies and giant U.S. growth stocks are going to dominate the global financial markets for the next 20 years, and he's wagering nearly all his clients' money on it. He calls that a "sure bet."

But when it comes to investing, there's only one sure bet: that sure bets don't exist. Back in 1896, Charles Henry Dow included American Cotton Oil Corp., American Sugar Refining Co., Distilling & Cattle Feeding Co., Laclede Gas Light Co. and U.S. Leather Co. in his brand-new Dow Jones Industrial Average. All the Markmans of the McKinley era were convinced that these outfits were a sure bet to remain among the greatest growth companies in the world; yet today they're so obscure Alex Trebek would refuse to use them in a Final Jeopardy question. For all we know, a future generation of investors will think Microsoft must have been a manufacturer of upholstered doll furniture.

Abraham Lincoln liked to tell the story of a Middle Eastern ruler who asked his wise men to invent a statement that would be true in every place and at every time, no matter what happened. After mulling it over, they answered: "And this, too, shall pass away." Sure, big growth stocks and tech companies pulverized everything in their path last year (and did darn well for a few years before that, too). But this, too, shall pass away. It must--unless you believe in a future world that has no industries except technology and no national economies except our own. That's why it always makes sense to own foreign stocks and value stocks, regardless of their recent returns.

And Markman's boast that his funds have beaten the market since he threw diversification out the window is pretty hollow. A one-year period is way too short to prove that Markman is right.

In any case, Markman defines being "right" the wrong way. To see why, let's imagine that you and I have been next-door neighbors our entire lives. Every year, you've paid roughly $1,000 for homeowner's insurance--while I have defiantly refused to insure my house. After 25 years, your house hasn't burned down, gotten crushed by a falling tree or been munched into dust by a swarm of termites. But neither has mine, so I lean across the picket fence and holler, "Hey Ed, you idiot! You wasted $25,000 on insuring yourself against risks that never even happened. And I never spent a penny. I told you I'd be proven right!" And here's what you'd answer: "Jason, you're the idiot, not me. I made a good decision, not a bad one. And you're not right--you're just lucky."

Likewise, if Markman happens to beat the market by putting nearly all his clients' eggs in one basket, will he be proven right--or just lucky?