In constructing a portfolio, an investor might have to decide between a concentrated portfolio verses one with a more diversified mix. Here, I try to explain both sides of the coin, focused around arguments regarding why one should or shouldn’t diversify. Readers can then weigh the points and decide on their strategy (if they haven’t done so already).
I’ll try to be as objective as possible, but there might be some opinion leaks, be careful!
What Does Diversification Do?
If done properly, diversification reduces the volatility of your returns. All else being equal, a diversified portfolio has lower potential downside, but it comes with a lowered potential return in general as a trade-off.
The reduced potential risks can differ, depending on how you choose to diversify. For example, picking multiple companies from the same industry (eg. DBS, OCBC, UOB) would reduce “internal” risks that are company specific – like fraud, or bad management. Diversifying across different industries would reduce sector risks