Beyond the Broad Brush of Diversification: A Framework for Thinking About Position Sizing

Creating a well-diversified portfolio of stocks or bonds (or whatever financial assets or vehicles seem appealing and fit a client’s profile) is certainly a viable option and one that may dampen volatility and could prevent any one bad idea from having an outsized impact on a portfolio. Alas, this decision is not without tradeoffs. Diversified portfolios, especially ones that effectively act as expensive closet indexes, doom an investor to pedestrian outcomes/returns. Families that are willing to stomach any extra volatility that may come along with concentration position themselves to compound their wealth at above-average rates.