03 December, 2021

Quora Answer: Why Should You Have a Concentrated Portfolio Versus a Diversified One?

The following is my answer to a Quora question: “Why should you have a concentrated portfolio versus a diversified one? 

A concentrated portfolio consists of a few specific equities and derivatives for the sole purpose of surpassing the benchmark.  It maximises potential gain at the expense of very high risk.  It works when you make the right call on the underlying assets and companies.  But when you miss, and you will eventually miss, the losses are great.  A concentrated portfolio generally takes advantage of a bubble, requires significant management, and for a short investment horizon. 

The opposite of it is a diversified, where the assets and investments are diversified across asset classes, industries, geographic regions and more.  The idea is to spread the risk since the chances of the entire market crashing is miniscule.  Such a portfolio generally minimises leveraging as well.  A good diversified portfolio is normally passively managed, has an extended investment horizon, and tends to outperform a concentrated portfolio over that extended investment horizon due to compounding. 

In summary, for most people, I would advocate a diversified portfolio.  Concentrated portfolios are for accredited investors with access to the latest market information and the best market analysis.

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