Have you ever wondered, between concentrated portfolio vs diversified portfolio, which one is meant for you?
Something’s that’s for certain is that a portfolio, be it concentrated or diversified, has its own pros and cons, and has been equally bringing benefits for investors of all kinds.
When choosing among concentrated portfolio vs diversified portfolio, there’s no right or wrong. The only thing that matters is what strategy will work out the best for you.
While starting your investment journey, it’s important to know what kind of investment options your portfolio is going to consist of.
So how could you make sure your portfolio is promising and could potentially bear profits? The answer is by understanding both these types of portfolios first.
Diversified Portfolio – An overview
As you get started with your investment journey, choosing your investment options is one of the most important things to contemplate on.
Diversification, as the name suggests, is the allocation of your capital into a variety of assets. A diversified portfolio consists of a variety of investments, belonging to different markets, depending on their research and preference.
It is a technique of investments that’s followed by a lot of investors for many reasons. However, the most common reason is to reduce the risk associated with volatility in the markets.
Quite simply, diversification means that you have shares in different markets so that if one of the shares underperform, the rest of your investments won’t be affected. This practically improves your Return on Investment (ROI).
Let’s take a closer look at the pros and cons of a diversified portfolio.
Pros of a diversified portfolio
The benefits of a diversified portfolio are commonly more than a concentrated one.
Some of the most common advantages of a diversified portfolio include:
- Lower Risks – If one of the stocks underperform, it won’t impact the rest of the investments.
- Additional profit ‘opportunities’ – As a diversified portfolio has investments in multiple places, if invested at the right places, the investments could bring a good profit. However, as compared to concentrated portfolios, the profit margins are usually lower.
- A Long-term approach – A diversified portfolio is an investment made for a longer period of time. With investments made for a longer time, the probability of profits also increases.
- Explore global markets – With such a portfolio, investors can explore different industries on a global scale and tap into the emerging market economy when the domestic markets aren’t doing well.
Cons of a diversified portfolio
While the diversification of your portfolio may seem profitable from the very first get-go, they could also end up hitting the value of your investments.
Here are some of the most common disadvantages of a diversified portfolio:
- Small market shares – With over-diversification, you would only own a part of a majority of the market, diluting your returns and impacting your portfolio.
- Hard to rebalance portfolio – A portfolio with dozens of holdings is hard to manage, monitor, and balance, provided the investor is constantly updated with what’s going on in the market.
Concentrated Portfolio – An overview
On the other hand, a concentrated investment strategy is something that comes into play when an investor wants to avoid the drawbacks of over-diversification.
While concentrated portfolios are infamous for their huge losses or profits, it’s one such technique of investments that could potentially be beneficial as well.
It’s a no-brainer that if the market performs well, the portfolio will be profitable as well and vice versa.
A concentrated investing strategy can bear serious profits as well as losses, again, depending on the risk-bearing capacity of the investor.
Let’s take a closer look at the pros and cons of a diversified portfolio.
Pros of a concentrated portfolio
In some cases and choices, concentrated portofilos could have the potential to generate more gains than a diversified portfolio.
Some of the most significant advantages of a concentrated portfolio include:
- Higher gains – With investments in a few good markets, the returns could be exceptionally well for a concentrated portfolio. Usually, concentrated portfolios generate more returns than a diversified portfolio.
- Easier to manage – As the investments are made in fewer markets, staying at the top of market trends and managing your portfolio becomes fairly easier.
Cons of a concentrated portfolio
While having promising profits, concentrated portfolios also have a few disadvantages that often make them a secondary priority among investors.
Here are some of those reasons:
- Higher risks – As the saying goes, ‘don’t put all your eggs in one basket’, concentrated portfolios could also make the investor suffer heavy losses if the market starts underperforming.
- Extended research – While investing in just a few markets, the research and selection process is notorious, especially when there’s no assurance of how the markets will perform. Competing with a concentrated portfolio requires more capital and research as the profits from a single investment are often less.
Concentrated Portfolio vs Diversified Portfolio – Which one should you choose?
Choosing between a diversified and concentrated portfolio depends on:
- Your financial goals
- Your risk-bearing capacity
- Your investment horizon
In a concentrated portfolio, market capitalization barely matters. On the other hand, having a diversified portfolio is something that lowers your risks exponentially.
However, in the terms of mutual funds, a concentrated portfolio is a preferred strategy because the risks associated are usually lower.
Choosing either of these strategies requires you to do extensive research and compare the risks against your financial goals, something which an expert can guide you about.
If you are confused about which of these strategies to choose, you can connect with us at MoneyIsle and we will connect you with our experts to help you achieve your financial goals.
