Warren Buffett is well-known for his investing success and timeless wisdom. Buffett’s company, Berkshire Hathaway (BRK.A 0.81%), a holding company of many companies, has also experienced much success in the stock market. So much so that investors sometimes choose to mirror Berkshire’s portfolio stock-by-stock.
When Berkshire released its holdings as of the end of the first quarter of 2023, one thing that stuck out to me was just how concentrated its portfolio was. With so many investors following Buffett’s lead, should you join and concentrate your portfolio? Probably not.
Concentrated portfolios can be a double-edged sword
A concentrated portfolio isn’t all bad; its upside is virtually limitless when it works out. Consider the fact Apple represents more than 47% of Berkshire’s portfolio.
| Company | Shares Owned | Percentage of Berkshire’s Portfolio |
|---|---|---|
| Apple (AAPL 1.60%) | 915,560,382 | 47.1% |
| Bank of America (BAC 0.76%) | 1,032,852,006 | 8.7% |
| Coca-Cola (KO 0.57%) | 400,000,000 | 7.3% |
| American Express (AXP 2.62%) | 151,610,700 | 6.8% |
| Chevron (CVX 1.02%) | 132,407,595 | 6.2% |
Data source: Berkshire Hathaway 13F filing / Data as of March 31, 2023.
Apple has been one of the best-performing stocks on the market in the past decade, and since Berkshire first bought shares in Q1 2016, its stock price is up more than 550%. Berkshire didn’t purchase all its current Apple shares at once, but it gives some perspective on how good Apple’s success has been for Berkshire.
On the flip side, a concentrated portfolio could easily be the downfall of someone’s portfolio. Berkshire’s success would look a lot different these past few years if a stock like Snowflake (SNOW 1.16%) — which has lost over a quarter of its value since Berkshire first invested at the initial public offering — was 47% of its portfolio.
Aim for diversification if you can
There’s a reason diversification is one of the key pillars of investing. By spreading your investments across different companies, sectors, geographies, and assets, you lessen some of the inherent risks of investing. If a couple of companies or sectors underperform, they won’t drag down your entire portfolio if the other components are holding up.
You may not see money-doubling short-term gains from a well-diversified stock portfolio, but it’s a natural “safety net” you don’t have with individual companies. When bear markets, recessions, and other economic setbacks happen, there’s no guarantee a particular company will make it through unscathed. It’s a much safer bet your diversified portfolio will.
Cover a lot of ground with a handful of investments
There’s no set number of stocks you should own for your portfolio to be considered diversified, but the Motley Fool recommends buying 25 or more companies over time. Doing this by investing in individual companies can be a bit tedious because of the time it may take to research different companies and industries.
An easier approach would be using an exchange-traded fund (ETF), which is a fund that contains many stocks within it and trades on a stock exchange like individual companies. Just as you could buy shares of Berkshire on a stock exchange, you can buy shares of an ETF.
A great starting point would be an S&P 500 ETF, which contains about 500 of the largest public U.S. companies by market cap. An S&P 500 ETF contains companies from all major sectors and is as close to a one-stop shop as an investor could need, in my opinion. It’s diversified, contains blue chip stocks, and has proven historical results.
If you want to invest outside the U.S. (which I recommend), a good option would be a broad international fund like the Vanguard Total International Stock ETF (VXUS 1.57%), which contains companies from developed and emerging markets. Having companies from both markets allows investors to get the best of both worlds: the stability of developed markets and the growth potential of emerging markets.
Your situation is different from someone else’s
A large part of investing comes down to your personal risk tolerance, investing style, and goals. There’s no doubt Buffett’s wisdom is worth listening to, and Berkshire’s moves are worth paying attention to, but at the end of the day, they’re not you. Your risk tolerance and goals may not align with theirs, and that’s perfectly fine.
A highly concentrated portfolio has worked for Berkshire and some other professional investors, but traditional investing wisdom warns against it — especially if you can’t dedicate the same amount of time to research that Buffett and his management team put in before making decisions.
For most investors, a diversified portfolio is a way to lower risk while still giving yourself a chance for promising returns.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company. Stefon Walters has positions in Apple and Vanguard Star Funds-Vanguard Total International Stock ETF. The Motley Fool has positions in and recommends Apple, Bank of America, Berkshire Hathaway, Snowflake, and Vanguard Star Funds-Vanguard Total International Stock ETF. The Motley Fool recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.