What are the differences between diversified portfolio and focused portfolio? Diversified portfolio means that you bought a lot of stocks, where normally more than 20 stocks. Focused portfolio means that you are only limited with less than 10 stocks, where each of them will take up at least 10% of your portfolio.
So, which type will be better? Again, the writer thinks that there is no answer for this, BUT diversified portfolio may be better for beginner or newbies. This is because you are interested in a lot of different stocks, and all of these have its own advantages that you would not want to let go. However, the downside of your portfolio is that there is limited growth even though most of the stocks will grow, but the ones that are not growing may drag the entire portfolio into losses.
On the other hand, focused portfolio is better for advanced investors. To be honest, investors with focused portfolio are mostly came from diversified portfolio. The only changes they made is to eliminate stocks that are less profitable compared to other stocks in hand. Hence, they will only be limited stocks left after a certain period of elimination, and each of them play an important role in the portfolio because each of them will at least contribute to 10% of the portfolio.
Even though focused portfolio may seem to be a better choice, but the benefit of having diversified portfolio is to not miss any opportunity. If you think any stocks is good in their own field, you may just acquire it, and by taking all the opportunities, the return may be decent as well. However, on the longer run, focused portfolio may be slightly better due to the compound gain. For example, if an investor with diversified portfolio took all the opportunities and is able to profit from the portfolio, they may choose those exceptional stocks and eliminate other slower stocks, converting them into focused portfolio.
In short, the writer thinks that diversified portfolio is the best for selecting stocks initially and take all the possible opportunity. However, as time goes, focused portfolio shall be preferable as you can compound your gain in the future from all those profitable stocks you have chosen from your initial diversified portfolio.
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