In investing, striking a balance is crucial. While diversification minimizes risk, an excessive number of assets complicates monitoring. A focused portfolio simplifies management, encourages thorough research, and potentially magnifies returns, emphasizing the need for a strategic equilibrium aligned with individual financial goals and circumstances.
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“I am pretty new to investing. I recently moved my money from Sharesies to Kernel and moved away from essentially day trading and now to funds. Kernel offers 19 options, so I thought, ‘Why Not?’ and so put a little into each. I have now learned you are meant to pick 2 or 3 and then figure out a percentage split and then just regularly invest following your split. All good; I’m happy to do that. So, I am now figuring out my top three and will then set up and auto-invest with a 50/25/25 split. My question is, why not do a little across all 19? It seems to minimise risk? So I’m curious why the best practice is to pick only 2 or 3?”
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When you invest in too many assets, it can become challenging to keep track of each one’s performance and the factors influencing them. Additionally, the gains in your best-performing assets may be diluted by losses in others, potentially limiting the overall growth of your portfolio. Here are a few reasons why many investors recommend focusing on a smaller number of assets:
Diversification for Risk Mitigation:
Diversifying your investment portfolio is a fundamental strategy to minimise risk by spreading your capital across different assets. This approach aims to protect your overall investment from the negative impact of poor performance in any single asset. While diversification is crucial, striking the right balance is vital. Investing in too many assets can lead to challenges in monitoring each investment’s performance and understanding the factors influencing them.
Simplifying Management:
Managing a portfolio with a smaller number of assets is more straightforward and requires less time and effort. It lets you stay informed about each investment’s performance, facilitating better decision-making. This simplicity in management becomes increasingly important as the number of assets in your portfolio grows. Focusing on a manageable number of investments enables you to conduct more in-depth research and gain a deeper understanding of each, contributing to more informed investment decisions.
Concentrated Returns and Informed Decision-Making:
Concentrating your investments on a smaller number of assets can magnify the impact of strong performers, as losses in numerous others do not dilute gains in these assets. This concentration can lead to more impactful returns. Additionally, having a focused portfolio encourages investors to research and understand the dynamics of each investment thoroughly. This deeper understanding enhances the ability to make informed decisions based on the specific factors influencing each asset.
Finding the Right Balance:
While a concentrated approach has its advantages, determining the optimal number of assets in your portfolio depends on various factors, including your risk tolerance, investment goals, and preferred level of involvement. Striking the right balance between diversification and concentration is crucial. It’s essential to tailor your portfolio strategy to align with your financial objectives, ensuring that your investment approach is both practical and comfortable for your individual circumstances.
Hope this helps.
Regards, Clive Fernandes (Financial Adviser)
Director – National Capital
Disclosure: I am the director of National Capital, a KiwiSaver advice firm. The views expressed in this article are the views of the author. The information provided is of a general nature and is not intended to be personalised financial advice. You may seek appropriate financial advice from a Financial Adviser to suit your individual circumstances or contact National Capital.
