When it comes to your investment portfolio, it becomes really tough to choose a proper stock trading strategy. The evergreen confusion is to concentrate or diversify, which one to choose? The selection of having a concentrated portfolio or a diversified one can make a big difference in your result.
In this article, I will tell you about both the strategies along with the positives and negatives they have so that you can make a wise decision on which method will serve you most as an investor. This will help you to look for the best stocks to buy now.
What Is Diversification?
Diversification refers to having a different range of investments in your portfolio. Here you can choose to invest your money in a variety of industries, companies, assets, or countries.
There are no specific criteria that a portfolio is required to meet for it in order to be thought as diverse. The general rule of a diversified portfolio is it offers exposure to a vast range of investments.
Advantages Of Diversifying:
Diversification offers its own benefits, and they are as follows.
- Here, in case one of your investments is not successful, then you have others to perform. So, the risks get automatically low.
- International diversification of investments keeps your portfolio less affected though there are any political issues or currency movements in your country.
- Diversification offers you exposure to a bunch of different assets and companies. It also increases the likelihood of choosing a winner.
Disadvantages Of Diversifying:
Along with the above-mentioned benefits, diversification also comes with some disadvantages as well. Here they are.
- It will be harder to research a bunch of investments compared to just a few.
- Sometimes diversification of a portfolio makes it unnecessarily confusing, complicated, and really hard to manage.
- When you spread out your investments, you are likely to get fewer gains from the areas that are successful.
What Is Concentration?
Now you know what diversification is. Consider concentration as the other end of the space. A concentrated portfolio is that which is heavily weighted in a specific area. And this can be any particular asset type, a single industry, a small number of companies, or one country.
Just like the diversified portfolio, for concentration, there is also no strict rule to make your portfolio concentrated. If the scope of your investment is really limited, it should be apparent.
Benefits Of Concentrating:
Now, let’s have a look at the positive side of concentrating on your portfolio.
- A limited portfolio will be much easier to manage.
- When you have a smaller number of investment options, the research work also becomes easier.
- In case your investment becomes successful, you will be able to see greater growth and gains.
Drawbacks Of Concentrating:
Everything comes with a positive and a negative side. We already have our introduction to the positive side of concentration, so it is time to look at the drawbacks of concentrating.
- When you have fewer investments, you are also getting fewer places to become potentially successful.
- In case you are wrong, a limited investment area comes with a greater downside.
- Any kind of unexpected news for a country, industry, or company can be really harmful in this case.
- As your portfolio relies on fewer investments, the level of risks will be higher.
Which Is The Better Stock Trading Strategy?
There is no definite answer to this question. The type of investor that you are and also the goals you have will only be able to determine which of these two strategies will be better for you.
In case you are a beginner, a concentrated one will be easier for you, as you will need to research in a little space. And with good research, you will be able to make more informed decisions on that limited area.
Taking a long-term approach is really worthwhile and gradually easing into things. In the beginning, it is recommended to start with five investments. As you will become more knowledgeable, start building your portfolio.
For someone who prefers fewer risks and has more experience, diversification can be a well-suited one. When you have more horses in the race, the chances of you winning the race increases.