Wednesday, February 01, 2017

Diversification versus Concentration

To me, diversification and concentration of investment portfolios both have their place.   Concentration, while much higher in risk and volatility, provides greater opportunity to significantly increase wealth.  Diversification is likely more stable, which is good for providing a source of income.  However, diversification and concentration both have their place.

Concentration - For me, this is best done for younger investors who do not have a short term need for the money being invested.   Thus, if the investment doesn't work out, it is not catastrophic.  If it does work out,  the excess returns will help achieve one's financial goals faster.   It may be a good idea to start a concentrated portfolio for our children so they have an early start for wealth building.

Diversification -  Now that we are retired, it may be best for us to be invested in a diversified portfolio or a broad market index ETF.  That way our retirement income does not depend on the fortunes of a just a few stocks or even just one equity class.  So it may be a good idea to be invested in variety of stocks, bonds and real estate in our retirement to keep a more stable recurring income stream.

So to me, whether diversification, concentration or a blend is an appropriate option depends on one's stage of life.

For more on The Practice of Personal Finance, check back Wednesdays for a new segment.

This is not financial or investing advice. Please consult a professional advisor.

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