I always hear analyst making a point on TV to have a diversified portfolio and making claims concentrated portfolio is risky. Anything is risky if you don’t know what you are doing. Isn’t it?
Let me share my thoughts on this.
I will quickly provide a brief of the 2 terms:
Concentrated portfolio: Having a very few stocks as investments in your portfolio
Diversified Portfolio: Having a wide range and number of stocks as investment in your portfolio
To explain you what would be the impact in both the cases, I will give a very simple example:
Now suppose, you have a portfolio of Rs 1 lakh and you are holding the below:
Case 1(Concentrated): 1 stock(Stock A)
If Stock A doubles in value, your 1 lakh turns to 2 lakh. There is also risk associated with it, in case the Stock A falls by 50%, so your 1 lakh turns to 50,000. But I would like to bet on the former.
One needs to have high conviction and should have done significant research to invest in such a manner. In addition, one needs to frequently track the performance and any news related to the stock and the sector. Also, much less riskier than any derivative instrument.
“BIG OPPORTUNITIES SHOULD BE SEIZED” Such opportunities don’t come often and to be honest,I have made killings by using this approach.
Case 2(Diversified): 5 stock
All the 5 stocks need to double. The possibility of 5 stocks from different sector to double in say a given period will is not that likely. On an average 2 will perform good, 1 average
and 2 bad. So eventually you would end up with average return.
Case 3(Highly Diversified: Simply Diworsified): 20 stock
Here, All the 20 stocks need to double which is almost impossible to identify such 20 stocks. Furthermore, the amount of effort to regularly track these 20 will be enormous and most likely, you will leave it to the mercy of Mr Market.
In case, you are not a full time investor nor you have the time to devote to the market, trusting Mutual Fund is the best way.
You can chose the best suited Mutual Fund based on their performance from the list in the link:
My point is further validated by non other than the legend “Warren Buffet”:
In case you have any query, please write in the comment below.