Concentrate stock portfolio

One unconventional tip for investors

Have you started investing in the stock market or have been for some time? Hope it's going well! Do you ever find that once you've bought some shares in a particular Company you don't tend to buy shares in that Company again? Instead you tend to focus on looking for the next investment. But what if the first Company you invested in was a good Company - why would you need to invest in something else? Presumably you thought it was a good Company to invest in initially for a good reason.

Give me the money and I'll diversify the portfolio

I bet if I gave you £100,000 you would find 10 new Companies in which to invest your money rather than to top up one or two existing shares, but is this a good strategy?

I'm sure that your logic is sound. It always makes sense to buy into additional Companies? That way you diversify your risk to ensure that you don't make any big losses in your overall portfolio. Afterall, playing a game of heads and tales will always feel less risky if you flip 10 coins for £1,000 each rather than 1 coin for £10,000.

This is how I've always invested. I'd have a nice portfolio of about five Companies that I liked and then I'd get some additional cash to invest and would start to invest in a sixth Company. Then I would save some more cash and invest in a seventh Company and then an eight and so on and so forth. The strategy gave me a decent return over the past 5 years of about 9% year on year. However on reflection and with the benefit of hindsight I believe that I could have done even better.

An alternative to diversification

I'm going to throw out a wild suggestion. What if l, instead of adding additional stocks to your portfolio you limited yourself to a maximum of five different shares. You can either top up an existing Company or else have to sell another Company in order to invest in a new one.

The reason for this approach is that by concentrating your portfolio you can achieve greater returns. Presumably when you first bought your first few shares you had very good reason for believing that they were the best shares that you could find. Why would you suddenly start investing in new shares when you had an awesome reason for investing in the initial Companies. Unless of course you think that the growth story in those original Companies is over, in which case, why are you still holding onto those shares.

I would reason that a seasoned investor can always rank which of their investment decisions they had more confidence in, so why not back yourself a little more. Concentrating your portfolio will have a huge impact on boosting your compounded returns if all goes well.

Personally, I wish I'd added to and invested more into one of my first share purchases. When I bought Lloyds Banking Group shares they were down in the dumps and unloved by the market. I bought £500 of shares. Over the time that I owned them I added almost £20,000 to my portfolio in many other Companies. However, Lloyds was always the one that I was most certain of its undervaluation. I tripled my money over the course of my investment and strongly regret not putting virtually all of the money into Lloyds. Hindsight can be a cruel mistress!

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