Concentration vs Diversification: Which Builds Wealth Faster?

People always say "You can't beat the market" but there are plenty of hedge funds that beat the market. Millennium Management has given on average 14% annually since inception. This is greater than the generally accepted market return of 7 to 8% (S&P 500).

If you are looking to beat the market think of your portfolio like a pyramid.

Think of bottom of the pyramid as the base. Keep it safe, this is your money if you lose your job. This is the money that will be around during your retirement. In general this would be cash, bonds and broad market ETFs such as SPY.

The next stage is riskier investments. In this stage you want to get concentrated on some higher growth stocks. A great strategy is to pick the top momentum stocks and rebalance on a regular basis i.e. monthly or yearly. I would make this a smaller percentage of your portfolio but it will likely grow faster than the base of your pyramid. I don't recommend picking stocks without a strategy in place. You can get lucky but you'll likely lose money over the long run.

If you bought invested $10K in 2010 here is how much money you would have today:

• SPY buy-and-hold: $10K → ~$59K

• S&P 500 Momentum (top ~50): $10K → ~$145K

• S&P 500 Momentum (top 10): $10K → $220K–$240K

The bottom line - the more concentrate you are the better you return can be. HOWEVER, there is additional risk involved so if you are deciding to invest talk to a qualified financial advisor first.

Lastly, the YOLO bucket...I don't believe in it. Stay away!