Traders are often confused about whether I should diversify my shares or do I concentrate on stocks? Before I go into detail, let me explain the difference between the two
Diversification strategy = Strategy by entering funds for investment/trading in more than one stock
Concentration strategy = Strategy by entering funds for investment/trading only in one stock
"Which one is better?"
Depends....
Both strategies do have their advantages and disadvantages. However, choosing to use diversification or stock concentration is a common problem experienced by most stock traders, not only beginners, but traders who have been around for quite a while (2 years) sometimes still don't fully understand the strategy right. Then, how is it right? Should I use diversification or just concentration?
OK, without further ado, let me explain...
I started from a beginner .. Suppose you are a beginner who wants to jump into trading in the capital market. If you are a beginner, I suggest you use a diversification strategy, don't concentrate. Why? Because beginners still need to learn a lot, you should invest in several stocks, so that you learn more about technical analysis. Beginners need a lot of flying hours, so you should try to get into a few stocks, and keep learning. This is also intended so that you can find out which stocks are "suitable" for you. When I was a beginner myself, I definitely used a diversification strategy.
And one more thing, the advantage of diversification, is that if you have 3 stocks, and your 1 share has decreased in price (loss), you still have 2 other stocks. Remember the Warren Buffet principle which says: "don't put your eggs in one basket"
"So should beginners use diversification?" My advice: YES...
"Then what if I am a stock trader who has been trading for a year or more? Is it better to use diversification or concentration?" Again, the answer depends...
Depends on what? It depends on the extent of your experience and whichever you are more comfortable with using diversification or concentration. My advice: if you are already in the world of capital markets, are good at predicting stock prices, and you do have a mainstay stock that can give you big returns, you can use a concentration strategy. The advantage of a concentration strategy over diversification is that the return you enjoy is greater because you trade all of your funds in only one stock. So, more concentrated.
The downside? If you use concentration, of course, if suddenly the stock price of the only company you hold drops, the loss will be bigger and you don't have "reserved" shares. Therefore, I said above, if you are already good at predicting stock prices, I suggest you just use concentration.
"Then if I've been trading often, does that mean I can't use diversification? Or is diversification just for beginners?"
No and no. Nothing forbids you from using diversification if you are a long enough trader. It turns out, in my experience, fellow traders who have been trading in the capital market for a long time, actually use diversification strategies more. Why? Because diversification gives you "convenience". Convenience in terms of stocks that you hold more and more, so that if one stock loses, you still have another. But what I want to emphasize here, it turns out that even though many traders have been trading for a long time, many do not understand how to use the right diversification strategy.
