Saturday, November 11, 2017

Concentrated Vs. Diversified Portfolios: Comparing the Pros and Cons.....

Courtesy: Investopedia

Most basic articles on investing advise having a diversified investment portfolio. Diversifying investments is touted as reducing both risk and volatility. However, while a diversified portfolio may indeed reduce your overall level of risk, it may also correspondingly reduce your potential level of capital gains reward. The more extensively diversified an investment portfolio, the greater the likelihood it, at best, mirrors the performance of the overall market. Since many investors aim for better than market average investment returns, they may wish to revisit the issue of diversification versus concentration in their portfolio choices.

Ways to Diversify a Portfolio

There are a number of ways to attain some level of diversification. One is simply company diversification, which is owning stock in more than one company. A portfolio can also be industry diversified. Owning stock in both a banking company and an insurance company is more diversified than simply owning two bank stocks. Further diversification can be achieved by investing in more than one market sector. Another means of diversification is to own stocks of companies with different levels of market capitalization, from small- to large-cap stocks. Portfolio diversification can also be achieved by investing globally rather than just in domestic stocks. Investing in different asset classes, such as stocks, bonds and futures, also creates diversification. Finally, investing choices based on varying trading strategies, such as growth investing and value investing, also provide diversification.
The real question for investors is to what extent they should diversify their investment portfolios, and the answer is that each individual investor should largely be driven by his personal investment goals, level of risk tolerance and choice of investment strategies. Investors should consider the relative advantages and disadvantages of diversification within that personalized investment framework.

Advantages of a Diversified Portfolio
Diversification reduces an investor's overall level of volatility and potential risk. When investments in one industry, market sector or asset class perform poorly, other investments in the portfolio with a negative correlation to the poorly performing investments should perform relatively better and at least partially offset losses and reduce the portfolio's overall volatility. Diversification may also open up additional profit opportunities. For example, an investor who chooses to diversify his portfolio with investments in foreign stocks may find he has invested in the stocks of countries experiencing economic booms, and those stocks produce large gains at a time when the performance of domestic stocks is mediocre to poor.
Disadvantages of Increasing Diversification
The disadvantages of diversification are less publicized, and therefore less well known, but the fact is diversification can also have adverse effects on an investment portfolio. Overly diversifying an investment portfolio tends to reduce potential gains and produce only, at best, average results. If your investment portfolio contains five stocks that are performing wonderfully, but 45 others that are not doing well, those stocks may substantially water down the gains realized from your best stock selections.
Another problem with aiming for broad diversity is it may require extra transaction costs to re-balance your portfolio to maintain that level of diversification. A widely diversified portfolio with a lot of different holdings is generally more trouble to monitor and adjust since the investor has to stay on top of so many different investments. Diversification can even increase risk if diversifying leads an investor to invest in companies or asset classes that he knows little or nothing about but have been added to a portfolio solely for the purpose of achieving diversification.
Advantages of Concentrated Portfolios
One of the advantages of a more concentrated portfolio is that while it does increase risk, it also increases potential reward. Investment portfolios that obtain the highest returns for investors are not typically widely diversified portfolios but those with investments concentrated in a few industries, market sectors or asset classes that are substantially outperforming the overall market. A more concentrated portfolio also enables investors to focus on a manageable number of quality investments.
The Bottom Line
The best path for an investor may be to aim for only a modest amount of diversity while putting his primary focus, not on diversification, but on selecting high-quality investments chosen in accord with his preferred investment strategy of growth investing, income investing or value investing; his personal risk tolerance level; and his overall investment goals. 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 on putting together a portfolio designed to best meet the personal investment goals and financial needs of the individual investor.



67 comments :

  1. dear sir can we enter c and c constructions at cmp?

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  2. Sir, Multibase India brought at rupees 250 ,after reading your blog
    Now 550,MAY I HOLD OR EXIT

    ReplyDelete
    Replies
    1. It is a steadily growing decent company .

      Delete
  3. Dear VP sir

    Your views on Lypsa gems and Kelly on tech if you are tracking these companies. Thanks in advance

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  4. Sir very timely article as i have been concentrating my portfolio of late. My portfolio size is approx 3 crs. From approx 15 stocks, i have now got it down to just 4 stocks with one stock 50% allocation and evenly balanced on the others. Your thoughts on whether this is okay given the portfolio size or does it become too concentrated?

    Primarily done so because of decreasing return expectation from other stocks due to mkts going up so much and still very high conviction about these 4 stocks. Thanks.

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  5. Dear VP, recent developments in Galaxy Entertainment, preferential allotment and appointment of CEO. Do you think the management's focus is now back in this company which was otherwise neglected so far. Can this be a turning point and a very positive development for this company.

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  6. Sir , u r view on Hotel Leela plz

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  7. Dear VP
    What's your views on unichem labs? Torrent is acquiring only domestic business which is more than current combined market cap...promoters intend to distribute at least 50% of proceeds towards shareholders and rest use for residual business which is showing improved operations every year..

    What's your thoughts on the same sir?
    Regards
    Ravi

    ReplyDelete
    Replies
    1. In these type cases , management integrity is most important.

      Delete
  8. Dear sir, what is your view on valiant communication after stellar result?

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  9. Sir, which stock u like or track from sugar sector ?

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  10. Sir, any thoughts on Orchid Oharma, only reason holding management by professionals, need to be patient? Thanks

    ReplyDelete
    Replies
    1. Now under interim resolution professional

      Delete
  11. Dear VP Sir,

    your view on "best steel logistics limited" please.

    Thanks,
    Dheeraj

    ReplyDelete
    Replies
    1. Discussed many times in the past , no change.

      Delete
  12. Hi VP Sir, Please share your views on Secur Credentials SME listed today. Thank You.

    ReplyDelete
  13. Hi VP sir, could you kindly let me know your view on Himadri speciality chemicals.. Thankyou for your time

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  14. Boss any view on emkay global and shiva granito

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  15. Hi Sir,

    Please provide your views on Kisan Mouldings, Kriti Industries and Kingfa Science and Tech.

    Thanks,

    ReplyDelete
  16. Hi Sir, Please share your views on medicamen Biotech. Thank you.

    ReplyDelete
    Replies
    1. This stock suggested to buy @ Rs.25 .At CMP Rs.625 it already returned 25 times .Neutral at CMP.

      Old posting below

      https://value-picks.blogspot.in/2010/03/medicamen-biotech-small-is-beautiful.html

      Delete
  17. any fresh advice on IL&FS Engg. I know you have suggested to move out, but with recent developments - Bharatmala announcement; turmoil in Saudi kingdom, do you revise your stance?

    ReplyDelete
    Replies
    1. Confused about the fate of Saudi Binladin group's stake in this company.

      Delete
  18. Dear VP, May I know why SISL and VSCL are getting traded in 3000 quantities, am I seeing the wrong script??

    ReplyDelete
  19. Sir, Need your current view on your old reco. PITTI LAMINATIONS LTD. Also would like to get some lights on AMD INDUSTRIES LTD.

    THANKS,

    ReplyDelete
  20. Dear sir
    Please share your thoughts about
    1.patspin India
    2.palred technology
    3.jk cement
    4. spice jet
    5.jet airways
    Thanks

    ReplyDelete
  21. Dear VP Sir,

    I got Khadim at @750 now it trading @700. please advise, can i hold or sell?
    Please reply sir.

    ReplyDelete
  22. Hi VP Sir, U have hit bulls eye once again. C & C constructions has posted excellent results. One more gift for us similar to Ramky Infra. Thanks you Sir.

    ReplyDelete
  23. Sir pl.share your valueable view on modison metals and samkrg piston

    ReplyDelete
    Replies
    1. Samkrg suggested at lower level ,prefer to hold

      Delete
  24. Hi VP,

    On MMB i am following you and your profile shows you have made 1069 comments but only 2 are visible. Do you hide them? If not, how to go through your previous comments.
    Since you have stopped giving recommendations this is easier way to hear your views.

    ReplyDelete
    Replies
    1. Didn't hide anything and not even know whether such a method available in MMB

      Delete
    2. Message get expired in 1 month in MMB. Thats why old messages are not visible.

      Delete
  25. Dear Sir,
    Please take a look on Lypsa Gems, Promoters reducing debt and increasing stack (bought approx 33 lacs shares in prev 2 qtrs).

    Thanks

    ReplyDelete
  26. Dear VP, please provide your opinion on Krebs results...
    2Cr rev is not earth shattering but do you think it is going in the right direction for a full revival in coming quarters?

    ReplyDelete
  27. Replies
    1. We have discussed all the developments happened till now when its stock price was half of current rate . Why you didn't bought at that time.? .

      Delete
  28. Sir please your view upon haryana leather and GSPL

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  29. Dear Sir
    What are your views regarding jaipan industries... It's Sept result seems encouraging

    ReplyDelete
  30. Sir do u track steel exchange of india?

    ReplyDelete
    Replies
    1. Not tracking above mentioned companies.

      Delete
    2. Sir - your view on oriental abrasives

      Delete
  31. Sir any view on JITF infra , Confidence Petro and supreme Infrastructure..?

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  32. sir , sreeleathers your view please

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  33. Hi sir, Please let me know your views on Parag milk products. Thanks.

    ReplyDelete
  34. Dear VP Sir,
    Your valuable comments on the results of Arrow Greentech pls.
    With kind regards
    Shrikant Joshi

    ReplyDelete
  35. What is your view on Lupin?

    Any particular stock in pharma sector you would suggest?

    ReplyDelete
  36. Sir do you track 20 microns ? Your views please.

    ReplyDelete
  37. Please your view upon. Gitanjali gems and sree rasalyane

    ReplyDelete
  38. Dear Sir,
    MM Forging appreciated couple of times from the recommended levels.
    Let us know your current view please.
    Thanks in Advance.

    ReplyDelete
  39. Sir what is your view on Marksan pharma?

    ReplyDelete
  40. Sir, Is it time to re-enter into SKM egg products?

    ReplyDelete
  41. Sir , do u track Bajaj steel industries?

    ReplyDelete
  42. Dude.. what do you think about bhushan steel / monnet ispat / amtek auto / jp infra / db realty ?

    ReplyDelete

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