Q: Most of my stock portfolio (about 75%) is concentrated in just three sectors of the market — technology, banking, and consumer goods — as these are the industries I know best. Should I diversify a bit more?
The short answer is not necessarily. About 60% of my own portfolio is made up of just two sectors: financials and real estate. Why? Those are the stocks I know how to analyze very well.
On the other hand, I don’t understand healthcare stocks very well, and I just can’t justify some of the current valuations in the tech sector, so these make up only a tiny portion of my portfolio.
One of my favorite pieces of Warren Buffett wisdom is this quote: “You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
Buffett’s investment strategy certainly lacks diversification in the traditional sense. Between the insurance companies Berkshire Hathaway owns and the many bank stocks in its portfolio, Buffett definitely favors the financial sector. And I don’t know of any longtime Berkshire shareholders who have any problems with a lack of diversification.
The point is that it’s completely fine to have a lack of diversification in your portfolio if the reason behind it is that you’re very good at evaluating stocks in certain industries.
I will, however, say that it’s important to diversify within your circle of competence. I own about a dozen real estate stocks, for example, and Berkshire Hathaway owns several different bank stocks. As long as you do this, sticking to what you know is a strength, not a weakness.
- Jun 14, 2019 at 12:00PM
- Investment Planning
Berkshire Hathaway (B shares)