It would be safe to say that wealth creation is the purpose of human existence. A lot of people are just in life to make money, for different reasons. Some people just to have a sense of security, some because they are unsatisfied with the present state of things in their lives and are looking to better themselves and their families.
Whatever your reason for trying to earn more or to get involved in the creation of wealth, it is important to understand certain things about your finances. Whether you are looking to be an investor or to run a business where other people can invest, certain financial facts should not elude you.
One of these is the concept of a concentrated portfolio and a diversified one.
When one is looking to go into investment or is looking to invest in a business or anything at all, a portfolio is necessary. A portfolio is made up of monetary acquisitions such as bonds, stocks, cash, and its equivalents as well as exchange-traded funds and closed-end funds. What constitutes your portfolio is what makes it either concentrated or diversified.
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It is important to note that there is no "one fits all" technique for investment. You could decide to either have a concentrated portfolio or a diversified one. This article, however, is looking to walk you through how you can adapt both methods. That is, create wealth through a concentrated portfolio and sustain this wealth by diversifying.
A concentrated portfolio as rightly implied by the name is one where the investor invests majorly in a particular stock, asset class, or sector for a particular period. This usually happens when they are confident about any of these sectors.
For example, an investor could assess how well the real estate market has done over the past few years and posits that it will still do as well in the next few years and decides to invest about 80% of his holdings into just real estate instead of investing a little in real estate and a little in other sectors. By doing this, this investor has created a concentrated profile, because he is only involved in one particular investment.
The problem with this type of investment portfolio is that the risks are very high. If, despite the meticulous assessment carried out by the investor before investment, the real estate market does not do as well as expected, the investor suffers a massive loss and that is detrimental to business. The good thing about it too is that if the investment makes the estimated return that is a huge turnover for the investor.
On the other hand, a diversified portfolio is when an investor invests in a little of everything. Emphasis is not only laid on a particular sector or stock but on a number of them. For example, if the investor earlier mentioned decides to invest in infrastructure, the auto sector, and real estate instead of just real estate, the investor is said to have a diversified portfolio.
By operating with a diversified portfolio, the investors decide to scatter the risks. So if the investment in one sector does not turn out as good as anticipated, the others will, thereby reducing the overall risks accrued in the course of the investment.
Now as much as it is necessary to know how these two types of portfolios operate, it is also very important to know how you can make even more money by working with both of them.
It is always said that risks are a necessary part of business and investments. To be successful in investment or business, there are difficult decisions that have to be taken, and serious risks too that you have to take.
If you go into business and you always want to take it slow and be extremely careful, chances are that you might never hit it as big as you want. The richest businessmen and investors have time and time again had to take huge risks, some of which led to the loss of a lot of money but which also eventually led to their success.
Using the concentrated strategy is a sure way to make a good profit and faster too. It is important that at the beginning of business, you invest most of your holdings into a particular sector instead of in different sectors as you are sure to make more money from the latter and less from the former.
By making use of this strategy, you will acquire lower securities, therefore, making it easy for you to organize your portfolio more conveniently and efficiently. Also, if you make the right decisions with your portfolios, your prospective gains would be higher which may lead to the outperformance of your portfolio on the benchmark index returns. This way, you have laid a secure foundation for your investment and wealth.
Now, to not "fumble the bag", it is advisable that you diversify your portfolio as time goes on. It would not be unusual to get greedy and want to go on with the concentrated portfolio especially if the business has been good.
It would therefore be a safer and smarter decision to invest in different stocks and sectors at a particular time to avoid taking unnecessary risks that can tank your business or portfolio. If and when you invest in several sectors, some of them are sure to do well and some would not do as well. Because of the diversification strategy, the overall losses are less and have a lesser impact on your investment portfolio.
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True. Which is why diversification is important.