Diversification vs. Concentration for an Investment Portfolio
A number of investors make an attempt to outsmart and outperform the market by building an under-diversified portfolio concentrated on a few selected stocks that they believe are “better” investments than the broader market. It’s important to understand the fundamental principle in finance that the idiosyncratic risk which accompanies a concentrated portfolio is not rewarded by higher expected returns for an investor.
This includes the risk that any one company may go bankrupt and result in a 100% loss of equity investment. This article notes that “yes, a combination of undiversification and good luck can deliver fantastic returns. But a combination of undiversification and bad luck can decimate a portfolio and retirement prospects.”
Investors are typically better off taking advantage of the benefits of diversification and constructing a strategically allocated portfolio that provides optimized expected returns within the constraints of their risk tolerance to meet their financial objectives.
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- Anthony Winkels is Managing Partner and Wealth Advisor at Fortis Wealth Management
