Concentration or diversification – which makes better investments

Common wisdom seems to suggest that you should diversify your investments.

But is this correct?

In my opinion it is wrong, in fact I remember reading Napoleon Hill’s great book Think and Grow Rich many years ago where he also said that successful people specialise in one area they don’t diversified.

On the other hand you will find many financial planners telling you to diversify.

Averageness

In my mind this leads to averageness – bottom of the best and cream of the bottom.

In my experience I’ve found that  wealthy and successful people – be they a business person, entrepreneur or investor – have one in common: they specialise.

They all focus their concentration on one single earning activity.

They eventually became exceptional in that one activity by continuously improving their skills and increasing their knowledge in that one activity.

Despite the myth going round that it is good to have multiple streams of income the wealthy very rarely engaged in multiple earning activities.

I remember one astute colleague telling me “If I try to do five things to earn money, I will lose money in all five things. So I focus on doing one thing really well.”

First they concentrate, then they reinvest

Another thing the successful people all had in common was that they reinvested the money they “earned” from that one activity into passive investments – most often real estate.

They kept building their asset base so that it would one day provides them “unearned income” – income they do not have to work for.

The lesson from this is to specialise and concentrate your activities on something you can become good at.

Then invest your income into high-growth assets building your asset base until you have your own cash machine.

You will never become wealthy by working for your money; you can only become wealthy if your money works for you while you’re asleep.

Risk mitigation

However as your portfolio grows in size here are some areas where you can diversify:

1. Diversify lenders – just as banks worry about “concentration risk” if they have lent you money for “too many properties”, it doesn’t make sense to have lender loyalty – spread your risks by using a number of banks
2. Diversify loan terms and types – protect yourself form interest rate fluctuations by having some loans fixed and some with variable interest rates. if you only have one loan you can split it into both fixed and variable in most cases
3. Diversify your investments across different states to take advantage of their individual cycles
4. Tenant and property types – I own residential, commercial and industrial properties, apartments and townhouses

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from Property UpdateProperty Update https://propertyupdate.com.au/concentration-diversification-makes-better-investments/