Concentrated Portfolio OR Diversified Portfolio?

There are arguments in favour of both concentrated portfolios and diversified portfolios in terms of risks and rewards. Therefore, DSIJ conducted a study spread over both bullish and bearish phases to find out if one is indeed better than the other.

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In the world of investing you might have come across various quotes from seasoned investors such as: “Never put all your eggs in one basket.” This essentially means that you should not really depend on any single stock or investment or asset class. You should actually diversify your investments to reduce the risk. This is the only free lunch available in finance where the risk reduces without impacting the potential returns. Another quote is: “Diversification may preserve wealth, but concentration builds wealth.” This is a famous quote from Warren Buffett. The question is how can you link these quotes to portfolio styles?

The first one supports a diversified portfolio style and the second one supports a concentrated portfolio style. When you invest in mutual funds, you are essentially buying a portfolio of stocks or bonds rather than individual securities. Therefore, it is not just the experience of the fund manager or his style of investing that matters but even the portfolio style adopted by the fund. There are two types of portfolio styles – concentrated portfolio and diversified portfolio. In the following paragraphs we will try to understand them individually.

Diversified Portfolio