One of the most debated questions in investing is how many positions to hold. A concentrated portfolio bets big on a few high-conviction ideas, while a diversified portfolio spreads risk across many holdings. Both approaches have produced successful investors, and understanding the tradeoffs helps you choose the right strategy.
What is a Concentrated Portfolio?
A concentrated portfolio typically holds 5-15 positions with significant allocation to each:
Characteristics
- Few positions: Usually 5-15 stocks
- Large position sizes: Top holdings may be 10-20% each
- High conviction: Only best ideas make the cut
- Active management: Requires deep research on each holding
- Potential for high returns: Winners have outsized impact
Famous Concentrated Investors
- Warren Buffett: Often held large positions in few companies
- Charlie Munger: Advocated for concentration in best ideas
- Stanley Druckenmiller: Made concentrated macro bets
Buffett's view: "Diversification is protection against ignorance. It makes little sense if you know what you are doing."
What is a Diversified Portfolio?
A diversified portfolio spreads investments across many positions and asset classes:
Characteristics
- Many positions: 30-100+ holdings
- Smaller position sizes: No single stock dominates
- Broad exposure: Multiple sectors, geographies, asset classes
- Risk reduction: No single failure can devastate the portfolio
- Index-like behavior: Returns approximate market performance
Proponents of Diversification
- John Bogle: Founded Vanguard and championed index investing
- Modern Portfolio Theory: Academic research supports diversification
- Ray Dalio: Uses diversification across asset classes
The Case for Concentration
Advantages
- Potential for market-beating returns: Big positions in winners compound faster
- Deep knowledge: Fewer holdings means you can know each one thoroughly
- Conviction-based: Only your best ideas get capital
- Simpler to manage: Fewer positions to track and research
- Avoids diworsification: Adding mediocre ideas dilutes returns
Requirements for Success
- Superior stock selection skills
- Deep research capabilities
- Emotional discipline to hold through volatility
- Strong conviction in your analysis
- Time to monitor positions closely
Risks
- One bad pick can significantly hurt returns
- Higher volatility and drawdowns
- Potential for permanent capital loss
- Requires being right most of the time
The Case for Diversification
Advantages
- Risk reduction: No single company can devastate your portfolio
- Smoother returns: Less volatility over time
- Protection from mistakes: Bad picks have limited impact
- Market returns: Broadly diversified portfolios capture market growth
- Less stress: Individual company news matters less
Benefits for Most Investors
- Do not need to pick winners
- Less time required for research
- Emotional peace of mind
- Proven long-term results
- Works even with limited investment knowledge
Risks
- Cannot outperform the market significantly
- May hold mediocre companies
- Too many holdings can become unmanageable
- Analysis paralysis from too many options
Finding the Right Balance
The Optimal Number of Stocks
Research suggests diminishing benefits after a certain point:
- 10-15 stocks: Eliminates about 80% of unsystematic risk
- 20-30 stocks: Eliminates about 90% of unsystematic risk
- 50+ stocks: Marginal additional risk reduction
The Sweet Spot
For most individual investors, 20-30 well-chosen stocks provides:
- Sufficient diversification to reduce stock-specific risk
- Few enough positions to know each company well
- Room for high-conviction positions to matter
- Manageable portfolio to track and rebalance
Factors to Consider
Your Skill Level
- Beginner: Lean toward diversification with index funds
- Intermediate: Moderate diversification with some individual stocks
- Expert: Can consider more concentration if justified by skill
Your Time Commitment
- Limited time: Diversified index funds require minimal monitoring
- Part-time: 20-30 stocks is manageable
- Full-time: Can handle concentrated portfolio research demands
Your Risk Tolerance
- Low: Highly diversified approach
- Moderate: Balanced with some concentration in top ideas
- High: Can handle concentrated portfolio volatility
Portfolio Size
- Small portfolios: May need to start concentrated out of necessity
- Large portfolios: More flexibility in approach
- Retirement savings: Typically favor diversification
A Hybrid Approach
Many successful investors combine both strategies:
Core-Satellite Model
- Core (70-80%): Diversified index funds
- Satellite (20-30%): Concentrated high-conviction positions
- Gets benefits of both approaches
Tiered Position Sizing
- Tier 1 (5-10% each): Highest conviction positions
- Tier 2 (2-5% each): Good ideas with less certainty
- Tier 3 (1-2% each): Speculative or early-stage positions
Analyze Your Portfolio Concentration
Pro Trader Dashboard shows your position sizes and concentration risk clearly.
Summary
Concentrated portfolios can generate exceptional returns but require superior skill and emotional discipline. Diversified portfolios provide more reliable, less volatile results suitable for most investors. The optimal approach depends on your skill level, time commitment, and risk tolerance. Most individual investors benefit from a hybrid approach: diversified core holdings supplemented by concentrated positions in their highest conviction ideas. Start more diversified and increase concentration only as your skills and conviction warrant.
Learn more: how many stocks to own and portfolio diversification guide.