With investing, diversifying has become a given at this point, and is the default for individuals, financial advisors, companies, and institutions. It is one of the few universally held investment beliefs. This is why mutual funds and even the S&P 500 have become so popular. I have been in conversations multiple times where just mentioning diversification makes heads nod and brings arguments to a consensus. It has an almost magical effect. I want to add some nuance:

People looking to build wealth should concentrate on an investment or profession, whereas people with the wealth they wish to keep should diversify. Neither is bad in and of themselves, but it is important to note that diversification is not always the answer, and people should be more thoughtful of where they put their time and money.

I don't mean concentration in the sense of deep focus, although that is required. I am using concentration similar to the frozen orange juice product you add water to. Concentration is about narrowing in and backing one or a few wealth-building investments and activities. Diversification is about the law of large numbers. Concentration is about picking a few oversized bets that can have large payouts.   

Because time is more valuable than any wealth we might hold, typically, what people will do is put the majority of their time in training and working in an industry that is their primary wealth builder. They might work a 9 to 5 job or start and run a company, but all their wealth comes from one source. They then take that wealth they wish to preserve and put it in a diversified portfolio. That diversified portfolio will not make them rich (compounding interest aside, which deserves a separate post). Diversification, especially with rebalancing, means lots of little trades, which means your wealth manager gets rich, not you.

Oversized bets with your wealth require less work to maintain. Oversized bets with your time are where you are going to spend most of your time and efforts. Concentrating your wealth increases your risk, however, it requires less time to maintain. No one wants to lose wealth, but we are generally okay wasting time. It probably should be the other way around.

The super-wealthy keep almost all their net worth concentrated in one or a few assets. Look at Elon Musk or Jeff Bezos; their wealth is virtually all in one or a few companies they have started. These are the results of concentrated bets. Bets that built extreme wealth.

The model for everyone should be to diversify until you gain enough conviction that you can concentrate. While going to school, most don't know what they want to do professionally until they are a few years into school. Once they find something that compels them, they make it the point of their studies and their focus professionally for the next 40 years. This is the concentration of time. Diversification of time means you are trying to maintain your personal status quo.

We also do this with the person we marry. We spend a lot of time dating people. After years of dating, we eventually find the right person to make an oversized bet on and marry them. We bet our kids on them. Even with children, we can diversify and have many kids hoping some will turn out good, or we can have a few and concentrate our time and efforts on making them good. One of my wife and my biggest drawbacks to having more kids is that we cannot give each child enough time and one on one attention. Do we follow the concentration model with our kids, or do we diversify?

Ironically, most people will follow the diversified portfolio model, but not the diversified time model. Someone who is diversifying their time will have multiple revenue streams. The world might be moving in that direction, but conventional wisdom has not. I am not opposed to someone with only one income. I am all about concentration, but it needs to be purposeful. If you have concentrated your time in your career and it is not paying off, you should probably be diversifying with a side hustle or something for when you can later make your oversized bet.

It is the same with investing with one's wealth. One should diversify until they find something that gives them enough conviction to concentrate. It may be they are starting a company, and they pull all their resources together to start that business. It could be a company they want to invest in. My latest conviction trade was bitcoin.

That is also not to say that if you find conviction you should go all in. Some do, and they are comfortable with that risk. Most are not. I personally think it is better to make oversized bets, not all-in bets. That could look like 20-50% of your portfolio or net worth. It will hurt badly if you lose, but it will make all the difference if you win. A diversified portfolio might allocate 1% or even 5% in an asset. You will not notice at the end of your life if you lost 5%.

Most have diversified portfolios because the most important thing is to avoid all losses at the expense of only making enough to keep up with inflation (another post is deserved on why inflation is higher than most think). Concentrating means you are are risking a loss. If you do not risk a loss, then you do not deserve large winnings.

I want all of my oversized bets to be asymmetric. If I lose the bet, it cannot put me in financial ruin. If the bet works, I should see many multiple returns. This is why bitcoin is one of the best asymmetric bets from an investment perspective now. It could (but is not likely) go to zero, but has the upside potential to 10x, 100x, or even more from the current price. If you put in 20-50% of your portfolio in a bet, you could see an enormous return, but importantly at 20%, you will not put yourself in financial ruin. Asymmetric bets should hurt if you lose, but not ruin you, and have the upside to make life-changing gains.

The worst of all diversification tools is rebalancing. Rebalancing is solely a tool for diversification. It is taking from winners and giving to losers. It is socializing your portfolio. If you make an oversized bet and it is winning (or losing), let it ride. See your investment through. Rebalancing takes haircuts off your bet each time it wins and is no better than a diversified portfolio that performs well. If you are going to rebalance, you should not make the oversized bet in the first place. If you have mutual funds and have chosen to rebalance, know that you are diversifying a diversified portfolio.

The most important point to stress when one concentrates one's time or wealth is conviction. If you do not have conviction, do not concentrate your time or money. Conviction is not a wish to get rich. You will not make money hoping. Do not make oversized bets because there is the potential for something to explode in price. That is the VC model, but even then, they diversify with a lot of bets expecting most to lose. Most people do not have the wealth to follow the VC model.

Conviction is well researched and well thought out. It is knowing an industry and knowing the bet is more likely to succeed than fail. Don't be the person who buys GameStop because it is on the news. Be the one who buys GameStop because you were early on in the research about it being overly shorted. Be early to the show, not after the intermission. Coming in late to a trade is a form of diversification; you are diversifying through consensus of the masses. A good rule of thumb is that if you are not willing to give your oversized bet 7 years (rough average time for a business to become established), you lack conviction. If you make an oversized bet and pull out a year in, you probably were never convicted.

Conviction should only come after deep thought on a subject over years. Conviction should not come easy. You will usually only get a few things you will be deeply convicted about in a lifetime which will provide you your biggest bets. The more you say no to small things, the more you save yourself and your wealth for the big things. 

In this sense, diversification is good for the following things. It is a good strategy for your "waiting period," the wait time until you find your next big bet. It is also good if you do not want to risk your wealth or have no convictions. It might also be good if you are retiring and are in the wealth drawdown period and not the wealth creation period of your life.

It should be all of our goals to gain great conviction in areas we can concentrate our time and wealth in. We should diversify in the meantime until we can find our next area of deep conviction. This is the only way to build wealth.