Does It Pay To Be Diversified or Concentrated?

It’s an age-old market question: Do you concentrate and let your winners run? Or do you take profits, prop up your laggards, and smooth out volatility?

The answer to the question will depend on who you ask.

Diversification can come from many places

• Sector

• Risk Appetite (Growth vs. Income)

• Geography

• Market Cap

If you look at pure market returns (ignoring the volatility and heartache you would have experienced along the way), it would have paid to be in U.S. equities, particularly Technology. For those real risk-takers, exposure to Bitcoin would have yielded even better returns.

Thus far, 2025 has been the opposite of the last 10 years, with international stocks, bonds, and value outperforming large-cap U.S. growth. Foreign equities have gotten an additional boost as the U.S. dollar has depreciated against most major currencies.

The 101: Diversification vs. Concentration

Diversification is often considered a safer, long-term investment strategy. It is recommended for retail investors, pension funds, and institutional investors looking for steady, compounded growth with lower volatility.

Pros - Diversification spreads capital across multiple assets, minimising the impact of individual company failures or sector downturns. This strategy can deliver more consistent long-term performance as losses in some holdings are typically offset by gains elsewhere. With assets responding differently to varying economic conditions, diversified portfolios demonstrate resilience throughout market cycles. This approach also reduces the pressure on investors to identify top-performing stocks, allowing them to benefit from broader market growth without specialised expertise.

Cons - Diversification limits portfolio upside as strong performers have reduced overall impact, potentially restraining exceptional returns. When over-implemented, portfolios may function essentially as index funds, sacrificing the possibility of market-beating gains. Additionally, managing various investments across different sectors and asset classes increases complexity, requiring more time and attention to monitor effectively and make appropriate adjustments based on changing market conditions.

Concentration is favoured by high-conviction investors who believe they can pick superior stocks and outperform the market. Warren Buffett, Charlie Munger, and Carl Icahn supported concentration, arguing that true wealth is built by betting on a few great businesses rather than diversifying into mediocrity.

Pros - A focused investment approach enables higher potential returns through carefully selected, high-conviction positions that can substantially outperform broader markets. With fewer holdings, investors gain a deeper understanding of each investment, allowing for more thorough analysis and monitoring. This concentrated strategy also provides greater control and flexibility, as investors can make informed adjustments based on comprehensive knowledge of their specific companies or sectors rather than reacting to general market movements.

Cons - Concentrated portfolios face heightened vulnerability to individual company failures, sector downturns, or broader economic disruptions, potentially magnifying losses. This approach demands exceptional research capabilities, strong conviction, and emotional resilience to maintain positions during market turbulence. With fewer holdings providing limited cushioning against market movements, investors must also tolerate greater short-term value fluctuations, creating psychological challenges for those prioritising consistent portfolio stability.

What Do The Greats Say?

• Warren Buffet has famously referred to diversification as protection against ignorance, suggesting that investors who know what they're doing needn't diversify extensively.

• Carl Icahn prefers a concentrated investment strategy. He focuses on acquiring significant stakes in a limited number of companies with the potential for substantial improvement.

• Li Lu practices concentrated investing. He believes focusing on a few high-quality businesses allows for a deeper understanding and better long-term returns.

• Ray Dalio popularised the "risk parity" approach, which balances risk across various asset classes to achieve diversification.

• Kevin O'Leary, known from "Shark Tank," advises maintaining a diversified portfolio, suggesting that investors allocate their age as the percentage of bonds in their portfolios.

By The Numbers

We take a look at how different countries’ stock market indices have performed so far in 2025.

Diversification across different geographies has paid off so far in 2025. While we focus mostly on Australian and U.S. companies when discussing stock markets, some countries and sectors worldwide have seen strong gains in 2025.

Rather than having 80% of your investments in Nvidia, Amazon, Google, and CBA, here are some of the best-performing indices/commodities of 2025 so far:

Can you extrapolate a two-and-a-half-month performance as a structural trend? Or is this a mini-correction due to the recent outperformance of the U.S., which is currently at the bottom of the 2025 leaderboard?

Ten-Year History

We’ll zoom out now and look at the 10-year performance of each major indices/commodity to see how they’ve performed and where (in hindsight) you should have been invested.

*Note this excludes any dividends re-invested, with the below returns tracking purely the index or commodity price (gold/bitcoin)

The Takeaway?

If you were concentrated in the correct areas (hindsight is 20/20), then you made out like a bandit investing in the U.S.

Asia showed mixed performance but overall was positive if you avoided China, and Europe significantly lagged the market. Remembering the popular superannuation disclaimer that past performance is not an indicator of future performance. So, where should you be looking for the next 5 years? Here are some of the popular arguments you’ll see written:

1. The Contrarian - Europe and China's underperforming of late means they are due to outperform, which we are seeing in 2025 so far. Even in the last few days, China and Germany have announced fiscal stimulus to help boost the economy.

2. The bigger gets bigger – U.S. tech continues to grow and provide outsized global returns, helped by the new A.I. wave, which the U.S. is positioned perfectly for. Coupled with Donald Trump's ‘pro-America’ agenda to raise tariff taxes, cut government spending and lower income taxes.

3. The Money printer - Governments will continue to engage in excessive money printing (quantitative easing, fiscal stimulus, etc.), so the purchasing power of fiat currencies will continue to decline. Gold has preserved its value over centuries, acting as a safe haven during high inflation or currency crises. Bitcoin has a fixed supply and is designed to be deflationary—unlike fiat currencies, which can be printed infinitely.

If you’re bullish in certain areas and want to achieve outsized returns, then you need to be concentrated to achieve those returns. If you’re like almost all of us and have no idea what will happen next week, let alone in the next 5 years, it’s probably best to spread your chips across the table. There’s no one right answer that fits all. Happy investing.

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DISCLAIMER: Please note that the information provided in this newsletter is for educational purposes only and should not be considered financial advice. It is not intended to encourage you to buy/sell assets or make economic decisions. We strongly recommend conducting your own research before making any investment.