dchua1969

Diversification vs Concentration Strategy

OANDA:SPX500USD   S&P 500 Index
I get this question from time to time. Which is better ? Diversify your stock portfolio or place all bets in one sector ?

The answer really depends.

You heard of people becoming millionaires trading cryptocurrencies, high risk stocks like Gamestop, AMC Entertainment, IPOs , commodities and what have you.

Personally, I prefer a diversified portfolio for a fairly simple reason. It is not easy to spot sector rotation where tech stocks are not falling out of favour and in are the banks, real estate, industrial stocks, etc.

So, that way, when my tech stocks are down, my other portfolio shore me up , leaving my overall portfolio in the green. Please note that all 3 indices are still in the bullish trend so a healthy correction of 5-10% is acceptable. It is not to be viewed as BEARISH market as some analysts or the media would want you to believe.

Of course, you may suffer had you bought in recently.

Another thing about this strategy is your domain knowledge of that sector. For example, if you are very familiar in a particular industry , say banks, then you would know how to value it differently from other traders/investors. Still, no one sector is 100% bullish nor bearish all the time but they go through cycles. You need not be an expert at catching at the exact top or bottom but participate at a fairly good price and you still can make good profits.

Think of the sector as a specific sport you like. If you spent a lot of time swimming, then you are going to improve on your strokes, stamina and speed as compared to someone who does it once a fortnight. Same for the sector - you do your research , review the charts more than others, you will spot more patterns, understand the "personality" of the chart and your confidence grow over time as you invest in it.

Others like to have a flavour of different sports as it is more fun that way. Like me, I love running, swimming, walking in the nature, etc. So, you know a bit of each sport but not deep enough to win medals at competition, so to speak.

In conclusion, there is no one fixed strategy for everyone. Find something that you like and you can relate to so doing the research work becomes fun.

Comments

This makes for such an interesting discussion! We've featured it in Editors' Picks and look forward to reading what others say. Also well said: "Find something that you like and you can relate to so doing the research work becomes fun."
200 coins
+18 Reply
Congrats on Editor's pick!
+13 Reply
I was heavy invested on tech stocks, but in the past months i've learned that momentum rules (i prefer to swing trade)!
so, recently i've slowly rotated from techs to what are considered values (banks, energy, commerce, entertaining), although, when the right moment comes, i'll rotate back to tech, which is my favorite sector to invest in - i strongly believe in the next decades tech sector will be no1, as most companies are involved more or less in tech (from e-cars to robots, biotech, re-energy, AI and so on); semiconductors, especially is my favorite one, due to its multi-industries usage, ecars comes second and cloud-fintech-robots-AI third!
+9 Reply
blakewhite marinik
@marinik, I learned from some trading radio show that in the last recession it was the "MO MO MO"...AKA Momentum stock traders that did well. My question is, how do you identify "momentum stocks" or "Momentum ETFs" I'm a beginner. Thank you
+7 Reply
eric4479 blakewhite
@blakewhite, The Van Eck Vectors Social Sentiment ETF (BUZZ) selects 75 stocks with the most bullish social media sentiment and packages them into an ETF.
+2 Reply
eric4479 eric4479
@eric4479, Also found another, iShares Momentum ETF (MTUM), selects stocks based on price appreciation over six- and 12-month periods and low volatility over the past three years
+1 Reply
Stox2blox eric4479
@eric4479, dang
+1 Reply
Most of the indexes act the same. Everything was red today.
Nasdaq only corrects harder as it's up the most.
+6 Reply
Great one! Diversification is the way, for me at least.
+5 Reply
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