Why Diversification Beats Conviction
The more concentrated a portfolio is, the greater the risk of missing out on the market's biggest winners and underperforming.
ETF Specialist
Mentioned: Meta Platforms Inc (FB)
, Alphabet Inc (GOOG)
, Sears Holdings Corp (SHLD)
, Fairholme (FAIRX)
, Sequoia (SEQUX)
, AMG Yacktman Focused N (YAFFX)
, Vanguard Total Stock Market ETF (VTI)
, Amazon.com Inc (AMZN)
, Microsoft Corp (MSFT)
, Micron Technology Inc (MU)
A version of this article was published in the September 2018 issue of Morningstar ETFInvestor. Download a complimentary copy of Morningstar ETFInvestor by visiting the website.
Investing with conviction isn't necessarily a good idea. That may seem a bit counterintuitive, particularly with respect to manager selection. After all, an active manager's best ideas can shine more in a compact, high-conviction portfolio than they could in a better-diversified portfolio. It's hard to surmount active fees without taking bold active bets. But as portfolio concentration increases, so do the odds of underperforming the market.
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Alex Bryan has a position in the following securities mentioned above: VFMF. Find out about Morningstar’s editorial policies.