The concept of index investing goes back more than 40 years. Since its debut, there has been a constant debate between active equity management and more passive styles. Most money managers can’t beat the markets consistently, leading many investors to index their investments. On the other hand, some investors do beat the market regularly. There can be concentrated portfolio benefits for some.
The mantra of many financial advisors over the years has been preaching the benefits of diversification. For a broad investment strategy, mainly when saving long-term for retirement, this does have benefits. Proper diversification does allow investors to capitalize on the growth of specific sectors while planting seeds in down-turning industries so they can reap the benefits of their eventual development. Over time, exposure to every primary asset class yields the best results in a balanced and safe manner.
However, things may have gotten over-diversified, with many investors just turning to index funds that track the entire market at once. Index funds do make following market success much easier to do since they mimic the spread of the overall market they are pegged to. Since individual stocks are not traded all that much, there aren’t as many fees. Also, computerized control and hands-off management mean there are fewer commissions to pay along the way.
Concentrated portfolios do have their place when representing portions of a broader investment scheme. While a diversified portfolio might have 60 percent or more of its assets put into the stock market, an index fund will never beat the market. One of the primary advantages of a concentrated portfolio is the possibility of generating better gains.
A fund manager who focuses exclusively on particular stocks will be better than any computer-operated fund. They can really get to know the market, anticipate stock drops or gains, learn the cycles, and be in touch with the news coming out of Wall Street. They can make moves for their clients that generate impressive gains a general index fund could never hope to achieve.
Concentrated portfolio managers don’t have to be experts in every company out there. They need to find a select handful that they can honestly believe in to invest heavily with confidence. Finding a few winning horses is better than betting on them all.