If you have the courage of your convictions, you have the confidence to do what you believe is right, even though other people may not agree or approve.
Have you ever heard the expression, “don’t put all your eggs in one basket”? It’s the most overused expression to describe investment diversification. As investors with different levels of knowledge you probably share one thing in common and that is the awareness of diversification. For some, diversification means reduced risk and for others, diversification may mean a shortfall or dilution in capital growth. So how do you know what’s best for your situation? Should you diversify your portfolio, or should you hold a concentrated portfolio that focuses on a few high-quality businesses?
It’s worth pointing out that diversification can certainly help investors who want to invest in their future but lack the experience and knowledge in capital markets. In other words, diversification can smooth out the ride of the stock market and for some investors that’s a very big deal.
Here is where diversification can work against you, hence the “bad or ugly” part.
Let’s say we have just completed your personalized financial plan and together we noticed that both your past savings habits and your investment performance was the major contributor to your shortfall. So, how do we fix this? Well, you could save more, spend less, invest a lump sum amount today or you can rerun the projections and see what a higher, yet hypothetical investment return could do. Depending on your time horizon your required rate or return may not be that much higher. For example, if you’re 20 years away from retirement, perhaps an increase of 1% would remove the shortfall. Conversely, if your 5-10 years away from retirement, you may need an additional 2-3% return on your investments. This is where a concentrated portfolio could be more suitable.
Concentrated Portfolio
One of the benefits of a more concentrated portfolio is that while it does increase risk, it also increases potential gains. Investment portfolios that obtain the highest returns for investors are not usually widely diversified. That’s why investors need a financial plan with reasonable projections to help them uncover any shortfalls towards their personal goals. If you cannot save more or want to change your lifestyle by spending less, you may want to consider using time as your strategy. By taking on higher risk and spreading that risk over a longer period, a concentrate portfolio may be just what you need.
It’s worth pointing out that diversification can certainly help investors who want to invest in their future but lack the experience and knowledge in capital markets.
What is this week’s takeaway?
While some level of diversification should be a consideration in constructing an investment portfolio, it should not be the driving concern. The primary focus of an investment portfolio should always be meeting the personal goals and financial needs of the individual investor.
Have a great weekend!
Talk soon,
Michael
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This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness. This publication is not an offer to sell or a solicitation of an offer to buy any securities. The information in this publication is intended for informational purposes only and is not intended to constitute investment, financial, legal, tax or accounting advice.