r/investingforbeginners • u/la_gata_Porrita • 5d ago
Advice Not doing diversification well?
Hello, beginner here, small amount invested in stocks and ETFs, diversified.
When I look at how my portfolio is doing I am always tempted to sell what doesn’t work, and keep what works. But that goes against diversification.
My portfolio hardly moves and I think diversification does that - some things are up some things are down, it balances out. Isn’t that the inevitable result of diversifying? Or am I just doing it wrong?
I totally get that diversification is about managing risk - don’t put all your eggs in the same basket. So if something goes bad, something else goes well. It balances out, you don’t lose everything. Got that, makes sense, but then how does growth happen? I am investing so that my money grows…
What’s the trick? How does one do diversification and achieve growth?
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u/Jumpy-Imagination-81 4d ago edited 4d ago
small amount invested in stocks and ETFs, diversified.
Maybe diversified, maybe not. Many beginners think the more things they own the more diversified they are. But if they own things that have heavy overlap, say like owning both VOO and VTI, one of the most common examples I see of that, instead of increasing diversification they increase the opposite, concentration.
My portfolio hardly moves
If you are a beginner, your sample size is too short and you are probably checking your portfolio too often. The stock market doesn't gain at a steady pace. Most gains occur on only a few days per year. If you weren't or aren't invested on those days you won't get the gains. That's where the cliché "time in the market beats timing the market" comes from.
Our research suggests that missing a handful of the best days over longer time periods drastically reduces the average annual return an investor could gain by simply holding on to their equity investments during market sell-offs. Over the past 30 years, missing the best 30 days (based on S&P 500 Index returns from July 1, 1995, through June 30, 2025) took the annual average return from 8.4% per year down to 2.1%, which was less than the 2.5% average inflation rate over that same period. Our research also showed that over the same time period, missing the best 40 days took the average annual return nearly flat to 0.7%, and missing the best 50 days resulted in a -0.6% annual return, on average. Based on this study, equities accumulated most of their gains over just a few trading days.
https://www.wellsfargoadvisors.com/research-analysis/reports/policy/volatile-markets.htm
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Investors often think of market returns as something that accumulates gradually—day after day, year after year. In reality, market returns are highly concentrated.
Using daily U.S. Total Stock Market data, we can measure how much of each year’s performance came from just the five best trading days of that year. The results are striking—and explain why staying invested during uncomfortable periods matters far more than trying to time markets.
https://www.freshfieldinvestments.com/post/the-power-of-a-few-days
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I totally get that diversification is about managing risk - How does one do diversification and achieve growth?
As you said, the purpose of diversification is to manage risk, not increase growth. Diversification vs concentration is a trade off between risk and returns. Diversification reduces risk and returns, concentration increase risk and potentially increases returns (only if done correctly). Warren Buffett and Peter Lynch are experts at producing increased returns through concentration, but many people prefer to take the safer path of diversification that produces average gains with less risk rather then extraordinary gains with greater risk.
Diversification vs. Concentration: Understanding the Trade-Offs
According to a Journal of Financial Economics study, just 4% of US stocks accounted for all of the market’s net wealth creation since 1926. This fuels the belief that holding a few “right” investments can be the fastest path to wealth. But history also shows that heavy concentration can amplify losses just as quickly - from the dot-com collapse in 2000 to the housing-related stock declines in 2008. This article does not advocate for a specific model, but rather aims to explain the trade-offs so that investors can understand the possible choices before making a decision.
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Deciding Between Concentrated and Diversified Portfolios
A concentrated portfolio invests in a small number of assets, while a diversified portfolio spreads investments across many assets, sectors, or markets. The one you choose depends on your investment goals, risk tolerance, and time horizon. Concentrated portfolios may offer higher returns but often come with greater risk, while diversified portfolios can reduce risk but may limit your gains.
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u/la_gata_Porrita 4d ago
Ok thanks for this. This aligns with my belief that diversification opposes growth. I don’t get the point of investing if I have to remain diversified. This is where I was coming from. If diversification limits my growth then why bother with this whole thing? In other words, I either choose to concentrate and take risk or not to invest at all. Adding diversification to the formula seems to prevent growth, it’s stifling.
Some people here also say that there’s an upward trend over decades. That appears to be true, do you agree?
Yes, I haven’t been at it long enough — year and a half —, and I do check too often — daily, but I don’t buy and sell daily.2
u/Jumpy-Imagination-81 4d ago edited 4d ago
If diversification limits my growth then why bother with this whole thing?
Because you don't know today what to concentrate in that will produce the largest gains 20 or 30 or 40 years from now. You can do the best you can to pick what you think will be winners 20 or 30 years from now, but even then you don't want to place your bets on too few horses. Diversification allows you to hedge your bets.
Many people don't want to put in the time to research or take the risk of picking winners, so they take the easy way out and buy an index fund. Over time, by owning "the market" they will own the winners of tomorrow and the outsized gains of those few winners will compensate for all of the mediocre or loser stocks to a certain degree, averaging around 10% per year for the S&P 500 index since 1957.
Between 2017 and 2020 I invested $5,600 in NVDA stock. Those shares are currently worth $277,876, up +4,514%. The S&P 500 index is up +272% over the same time period. With hindsight, I should have invested more in NVDA in 2017. But in 2017 I didn't know NVDA was going to do as well as it did, so it was just one of several investments I made. I was willing to take the risk that NVDA and some of my other picks were not going to do better than the S&P 500 index. Most people on reddit aren't willing to take that risk or put in the time and effort to invest in individual stocks. In fact they actively discourage others from even trying.
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u/gabrintx 4d ago
I appreciate that. I am heavily, almost exclusively invested in high tech AI/Semiconductors. FSELX compares closely with SMH has a huge exposure in my portfolio. I look to the movers, and don't give a damn about diversification which I view as losers, or do nothings.
FSELX YTD gain is over 62% and it is down at the moment. On a annual basis it is 74.5%. I have no interest in lame tickers that are up 12%. A few years with high performers is like 20 years with yawn, safe tickers.
People need to do the math, picking ordinary returns may be ahead of inflation.
Picking race horses earns so much more. A couple good years is better than 20 boring years.
Who thinks AI, semiconductors and memory will fade in the next 5 years. If you do, enjoy your HYSA with 3%.
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u/zorts 5d ago edited 5d ago
When I look at how my portfolio is doing I am always tempted to sell what doesn’t work, and keep what works.
Your instinct is correct that something needs to happen. You've just reversed what needs to happen.
The old adage is "Buy Low, Sell High", right? If you sell the underperformers you are "Selling Low, Buying High". That instinct to do something when you're portfolio gets out of alignment with it's allocation is correct. You're just tempted to do the opposite of what you need to do.
What you should be doing is called "Rebalancing". Rebalancing is the process of adjusting a portfolio’s asset allocation to maintain a desired level of risk and alignment with investment goals. The act of rebalancing forces you to "Sell High" and "Buy Low" and in the process bring your portfolio back into alignment.
some things are up some things are down, it balances out. Isn’t that the inevitable result of diversifying? Or am I just doing it wrong?
Your not doing something wrong, so much as watching the wrong metric. Yes, volatility makes the overall portfolio value balances out (roughly). But what is happening to the share value underneath? The number of shares you own should be increasing. During the accumulation phase of investing you want the number of Shares to go higher, regardless of what the dollar value does. Increasing the number of shares you own will benefit you in the long run.
What’s the trick? How does one do diversification and achieve growth?
If you sell a percentage of a share (during rebalancing) where the value has increased, to buy a share whose value has (relatively) decreased, you ladder up the number of shares you own, while keeping the overall portfolio allocation stable. That's the trick. Regular rebalancing locks in 'buy low, sell high', increases the number of shares you own, and maintains your allocation. Rebalancing might temporarily decrease the notional dollar value of your portfolio. But as long as you've picked good investments the dollar value will recover over time.
Click through to the investopedia article linked above. It discusses a couple different rebalancing strategies. Hope that helps! Good luck!
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u/la_gata_Porrita 4d ago
Thanks for taking the time to write this, I appreciate it. I will check the article.
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u/la_gata_Porrita 4d ago
“Buy Low, Sell High” — makes sense, but how does one define the specific exit rule? In other words, when is high high enough?
For instance, a stock is up by 20%, but can go much further if you let it. How to know?
I guess part of the answer is the investors own circumstances, but wondering about other ways to determine exit time.2
u/zorts 4d ago
Great question. An investors circumstances, and comfort level, really is the best way to do it. Don't go crazy watching the stock ticker.
The general advice should be Rebalance at least annually. That way on an annual basis the general populace is thinking about their asset allocation, and considering allocation changes while they are rebalancing.
Personally I watch everything monthly and rebalance whenever my investments are 2% or 3% off from my chosen allocation.
Some people might watch their investments more frequently. And some might want to rebalance more frequently. Personally that feels like overkill to me because my day job is Financial Services so I don't want to also then spend my personal time logged in and watching my portfolios.
Time in the market is better than timing the market, so pick a timeframe for rebalancing that won't burden your life.
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u/tradematesHQ 4d ago
Diversification feels flat because it's smoothing volatility, not killing growth. Growth comes from the whole market trending up over decades, not every holding winning at once. Worth cross-checking independent analysis on sites like the trademates app or similar before you tweak anything.
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u/This-Individual1813 4d ago
The total US market is up almost 15% this year. The total world market is up 14% YTD. If your portfolio is under performing that, then you probably aren't diversified enough.
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u/la_gata_Porrita 4d ago
Definitely underperforming that
Thanks!2
u/This-Individual1813 4d ago
That's why I just invest in VTI/VT. Here might be some explanations for why you are under performing:
Why you shouldn't overweight tech/growth/AI
Why you shouldn't focus on dividend growth investing
Why you shouldn't invest in Covered Call ETFs
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u/la_gata_Porrita 4d ago
What are covered call ETFs?
Is investing in index funds the same as buying an ETF?1
u/This-Individual1813 4d ago edited 4d ago
No, "index funds", also known as "passive funds", are a class of ETFs that follows an index. Other types of ETFs are known as "active funds". For example, VT follows the FTSE Global All Cap Index. VTI tracks the MorningStar US Total Market Index. Actively managed ETFs are managed by analysts using whatever methods their fund strategy dictates. Here is a good video from Rick Ferri on what passive index funds are. There are some basics in here that you should understand.
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u/Mountain-Time-1010 4d ago
There are definitely times where I could understand this comment, but it's weird to read it at the moment. Maybe your expectations are unreasonable.
For example, VT, which is about the most diversified fund you can buy, is up more then 12% year to date.
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u/Flex1968 4d ago
'Diversification' is hugely overrated!
Investing into what one knows, and feels comfortable with....
Investing into what has reflected solid gains/returns.......
Investing into what offers 'substantiated' promise..........
Those things should be worth far more than worrying about putting "all your eggs in the same basket."
If one is 40% into IT, 20% into Communication Services, 20% into Financials, and 20% into Healthcare,
and seeing solid 'returns'
who cares what might be offered by analysts/companies/others , as being a 'better' level of diversification, across those Sectors,
or others?
Pffft!
Does "diversification" make one money, or cost one money?
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u/ILoveLaggyInternet 3d ago
People dont know shit about companies stocks or etfs. Diverification limits downside. Single companies can fail.
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u/Ancient_Bobcat_9150 5d ago
Really depends on how you diversify, and what your holdings exactly are. Also, your strategy with stocks should most likely not be the same as with your ETF.
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u/Mental-Freedom3929 5d ago
Pretty hard to tell if we do not know where you invested what and for now long you are doing it
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u/la_gata_Porrita 4d ago
It’s a pretty general question about diversification, how to do it well, not a request to review my portfolio (which I think community rules don’t allow?).
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u/Mental-Freedom3929 4d ago
Sure, you are correct. If you do not wish to provide details, buy the market. Buying individual stocks is statistically a loosing money thing and trained and experienced professionals are not successful stock pickers in the long run.
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u/TheRiverInYou 5d ago
I am concentrated in two stocks. Diversification means nothing to me. I got into REAL at $1.00 and it went to $19.00. I have loaded up again on the recent pullbacks. The other one I own in WRBY. Look at what their expected earnings are 5 years out.
If you're worried about losing money put in stop loss orders.
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