Next Investors logo grey

Is stock diversification really a good strategy?

Published 12-JUN-2020 10:05 A.M.


2 minute read

Hey! Looks like you have stumbled on the section of our website where we have archived articles from our old business model.

In 2019 the original founding team returned to run Next Investors, we changed our business model to only write about stocks we carefully research and are invested in for the long term.

The below articles were written under our previous business model. We have kept these articles online here for your reference.

Our new mission is to build a high performing ASX micro cap investment portfolio and share our research, analysis and investment strategy with our readers.

Click Here to View Latest Articles

Every time the market begins to rise the question that comes under intense discussion is the topic of sector investing and which sector is likely to perform best in the future.

So, why is this?

Because investors are told that they need to buy into different sectors to reduce their risk in order to achieve good returns.

Based on this philosophy, it is about investing in areas that counterbalance those that are likely to underperform, or in other words, when one sector is going down another will go up to balance out the portfolio.

While this may seem like great advice on the surface, when talking to investors who follow this strategy, they claim that while they can achieve good returns in the short term, they achieve very poor to average returns, at best, over any ten year period.

So, this begs the question as to who this type of investing really works well for.

While it’s likely that this form of portfolio construction benefits the industry, it is not very beneficial for investors as they typically end up holding 25 to 40 stocks in their portfolio.

When I see over diversified portfolios like this, it is very common to find that one third of the portfolio is rising while the remaining stocks are going down or sideways.

I refer to this as 'diworsification', given that a portfolio that is over diversified is exposed almost exclusively to market risk, which is why many investors end up achieving very mediocre returns.

In my opinion, you should spend less time worrying about which sector to invest in and spend more time looking for good stocks, because smart investing is about buying what goes up and selling what goes down.

Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also the author of the award-winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in book stores and online at

General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

Conflicts of Interest Notice

S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

Publication Notice and Disclaimer

The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.

This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.