Should You Concentrate or Diversify Your Investments?

With stocks (selective ones like tech, gloves and EV stocks) returning >300% in a year and cryptocurrencies breaking all-time highs, you start to hear some bullish investors lamenting:

“I should have trusted my guts and went ALL IN!”

But really, should you?

Concentrating or Diversifying one’s investments is an age-old conundrum. There is simply no right or wrong answer and it goes back to understanding yourself and your situation.

Here’s some pointers to help you if you are sitting on the fence. But actually, sitting on the fence is a decent choice too!

Concentrate Camp

You Have An Edge

In the crypto space, you are the alpha getting >10x or even 20x returns on a significant base when others are still counting the percentages to the decimal places.

Having a few multi-baggers in the stock market might be sheer luck. But you have spotted and invested in more than 10 or even 20 of such stocks in the past few years.

You start to ask, “What’s the point of keeping cash?”

You Are Far From Your Desired ‘Enough”

It could be a modest $500k or a high bar like $10 million. It could even be a moving goal post as you become a better rainmaker.

If you are far from the target, it is important to concentrate your bets. 

For lack of a better analogy, a 4-D punter who wants to win $200k would never place $10 bets on 10 different numbers. He would just stake $100 on his best combination and assume his probability is 50/50.

It’s Your Identity

You have staked your entire reputation on a particular stock/crypto or maybe just an asset class. Or you may be a trainer espousing a certain strategy.

Diversification, rebalancing/taking money off the table could be perceived as a betrayal of your beliefs and you risk losing your influence which comprises tens of thousands of followers.

Diversify Camp

You Are Close To Or Have Attained Your “Enough”

You have thought long and hard about how you want to spend a typical day of your life and have accumulated >70% of what is needed to facilitate such a lifestyle.

Preservation of capital is more important than growth at this stage. 

You Are More Worried About Losing Than Winning

If you are forced to invest half of your net worth in one of the options below, what would you choose?

1. A guaranteed return of 8% (double of CPF!) after a year
2. A 50/50 probability of doubling your money or halving it after a year*

Your answer should provide one of the best insights to yourself.

*From an expected return POV, the second option actually gives a higher payoff of 25%. 

You Have Blown Things Up Before

You have realised >80% losses before. Well, you might not even have gotten a single cent back from your initial capital.

There are sheeps that have been slaughtered in both the stock markets and the crypto space. 

If you fail to adhere to your rules and cut loss early or repeatedly capitulate during market downturns, you might need to diversify to protect your assets against yourself.

Few People Have What It Takes To Concentrate

Some people might daydream about having $10 million and claim that they should put all their eggs in one basket and then watch it very carefully in order to attain their goal.

However I personally believe that having an edge is a necessary condition (albeit insufficient) for concentration.

And by virtue of the definition of “having an edge”, few people would ever qualify.

Of course, if you never try, you never know.

But if proven wrong, do be humble enough to accept that you could just be a 小人物 and rebalance after a good year.

Thanks for reading.