A portfolio is a combination of wealth into two or more assets. The basic idea behind forming the portfolio is to reduce investment risk. A single stock might be very risky when held in isolation but not as much riske when held in combination with other assets in the portfolio. This is because the risk is spread between the assets.
Let us assume those assets are all stocks. Check out our portfolio (Here).
Diversification is popular for the very reason of less risky. Also, the index fund has gained popularity for the same the reason.
Psychological pain of loosing $100 is more painful than the happiness of gaining $100. Therefore, there is a popular saying – “Don’t put all your eggs in one basket”. This is an ideal tactics for majority of investors.
However, if you desire to have a better than the normal performance, concentrated portfolio is the key.
Concentrated portfolio is both risky and more awarding.
Portfolio Risk to zero
First, the portfolio risk depends on the riskiness of individual assets in the portfolio. Other things remaining the same higher the level of risk associated with individual assets higher will be the portfolio risk.
Reducing portfolio risk to zero can hardly be observed in reality. According to simple diversification, if we go on adding more number of assets in the portfolio, the risk can be reduced. Thus, by forming the portfolio risk can be reduced but not completely eliminated.
Final Thought
In stock investing, more risky does not mean more rewarding. Rather, the opposite is true. The more safer the assets, the more rewarding the return.
Concentrated portfolio is recommended for professionals or highly prudent investors. A sensible diversification is the way to go for retail investors like you and I. Since, we know portfolio risk can be reduced with a wise diversification. But, do not try to over do it. Portfolio risk cannot go to zero.
Arrow of Performance 