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I have been investing (softly) in stocks for the last 2 years or so. I am not an experienced stock investor but it seems to me that there is a consensus that some degree of diversification is a safer strategy. Considering that the goal is to balance safety and improve gains, I have been thinking that a better tactic would be:

A) diversity among different sectors/verticals (say retail, technology and utilities) or

B) diversify within a single sector (technology or retail) or even a single sub-sector (say ecommerce websites or infrastructure technology, or brick and mortar retail).

That said, what would be the questions or factors I should weight to define which tactic would be more adequate? Please note that I am not asking for an answer "this tactic", but pointers improve the skill of evaluating strategies.

PS: I searched for previous questions in the diversification or concentration theme here but I could not find an exact match. In general, they tackle diversification vs concentration or talk about diversifying different types of assets and investments.

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  • What is "soft" investing? – RonJohn Jan 6 at 22:10
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    I meant I was not investing much money and not dedicating too much energy on it. – Celso Bessa Jan 6 at 22:43
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Still a good read even if the guy is already dead for over 30 years: https://www.amazon.com/Intelligent-Investor-Book-Practical-Counsel/dp/0060155477 Warren Buffet was Graham's student.

The conclusion of the book is fairly straight forward. For an individual investor, it's pretty easy to match the average market return. It's almost impossible to do better and many professional investors and money managers fail miserably at it.

In fact, for the 15 years ending in December 2016, more than 90% of U.S. large-cap, mid-cap and small-cap funds helmed by managers did worse than the S&P 500, according to S&P Dow Indices data. 1

If you want to match the market, you just need to diversify as broadly as possible. If you want to increase returns, it's a much better bang for the buck to minimize your fees. All these fund managers that can't even keep up with the simple S&P 500 still get paid big bucks that come out of your pocket. Given the current expected return, the fees can make a big difference in your net returns.

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  • There's no better diversification than a broad index fund. That should be the starting point (and in most cases, ending point) of any casual investor. – wide.writing.immediately Jan 6 at 23:53
  • Indeed, Buffett's losses are soaring past fifty billion cnbc.com/2020/05/02/… and all he had to say for himself was "It really is hard to beat the S&P" – Fattie Jan 7 at 13:12
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If you diversify within a single sector, you reduce your risk than any single company in that sector will have a significant impact on your returns. However, if the sector as a whole goes up or down that will impact your returns.

The question you have to answer is why you think that a single sector is better than other sectors - more so than how the market has already priced it.

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