Diversification vs Concentration: Which strategy is better?

One of the most common questions I get from new investors is, “Should I spread my money across multiple assets or focus on just a few I believe in?”

This is what investors call diversification and concentration. And honestly, choosing between both can shape how your money grows or doesn’t.

In this post, I’ll break down both strategies so you can decide which one fits you best.

What is Diversification?

Diversification means you’re not putting all your money in one basket. You spread your investments across different assets like stocks, ETFs, fixed income, and more.

Let’s say you invest ₦50,000. Instead of using it all to buy shares of MTN, you split it among MTN, GTCO, and Dangote Sugar. That way, if MTN has a bad month, GTCO or Dangote might do better and balance things out.

Here’s what makes diversification smart:

• It lowers your risk.
• It protects you from unexpected losses.
• It gives your portfolio more stability, especially when the market is acting funny.
• If you’re new to investing or can’t afford to lose much, this strategy gives you some peace of mind.

What is Concentration?

Concentration is the opposite of diversification. Instead of spreading your money out, you focus on one or a few investments you believe in.

Let’s say you’re confident that Zenith Bank will perform well this year. So instead of spreading ₦50,000 across five stocks, you put the entire amount into Zenith Bank shares.

Why Do Some Investors Prefer This?

• They believe strongly in certain companies or sectors.

• It can give higher returns if that one investment performs well.
• It’s easier to track and manage just one or two assets.

But there’s a risk. If your pick doesn’t perform well, your entire investment takes a hit. No safety net.

Pros and Cons of Both Strategies

There’s no perfect answer. What matters is how much risk you’re willing to take and how much time you want to spend managing your investments.

Which Strategy is Better for You?

If you’re just starting out or don’t want to stress over the stock market every day, go with diversification. It helps you sleep better and protects your money.

If you’ve been investing for a while, have done your research, and are willing to take calculated risks, then concentration could work for you.

Ask yourself:

• Am I okay with losing money if my pick flops?
• Do I have enough knowledge to confidently pick one or two assets?
• Am I investing for the short term or long term?

What Do Successful Investors Do?

Warren Buffett is famous for concentrated investing. He once said, “Diversification is protection against ignorance.” He believes in focusing on a few great companies and going big.

But not everyone is Buffett.

A lot of investors stick with diversification every day. It may not make you rich overnight, but it helps you grow your money steadily, especially when you’re investing in a market like Nigeria’s that can be unpredictable.

Conclusion

Both diversification and concentration have their benefits. The key is knowing your goals, your risk appetite, and how much effort you’re willing to put in.

You don’t have to get it perfect on day one. Just start investing. Learn as you go. And adjust your strategy as you grow.

Download the Trove app and start building your strategy today.