How to Quit High-Concentration Investing

[Kupotea]

Hi everyone,

 

I'm in this unique situation that I'm hoping to get some honest feedback on. I have the enviable problem that capital preservation is more important to me now than growing my portfolio.

 

The challenge is, when I look at my historical investment returns for the last 8 or so years (I've invested for longer but it didn't really click until then) you would basically see these periods of extreme out performance during which I have a large percentage of my portfolio (usually 50%-100%) in a single stock or a basket of highly correlated stocks and then periods of pretty average or even below-average performance where I have a diversified portfolio of investments that I feel good about but they're not on the same level as my "high-conviction" ideas. I tend to only get a truly great investment idea every 1-3 years.

 

So, basically all my outperformance is from highly concentrating in my best ideas but I'm fully aware that eventually this strategy will blow up. Not because I invest in risky companies or use leverage but because I'm bound to eventually miss analyze something important or wake up one morning to some unforeseen black swan. I also have a family now unlike when I was younger and more money than we need to support our lifestyle so capital preservation and to a lesser extent income generation really should be the priority over growth.

 

My top ideas to fix this are:

 

1) Invest everything in some sort of balanced indexed portfolio or find someone else to manage the money. The thought of this kind of bums me out as I really do like investing and it feels like I have a very lucrative skill that I'm just wasting. Psychologically though, by separating myself from investing I know I won't be tempted to get highly-concentrated when I get really excited by an idea. Sort of a take your chips off the table and go home approach. 

 

2) Broad market index as the default but then set an arbitrary portfolio limit (25%?) for my truly high conviction/uncorrelated ideas. Find someway to enforce this limit (maybe make my wife have the password to our brokerage account and place the trades for me?). This seems like the most logical strategy but I'm worried that from a practical standpoint I'll get too bored only making an investment decision once every year or so and that will lead me to forcing ideas I'm not 100% confident in.

 

3) Due what normal investors due and try to create a more diversified portfolio of companies with stricter limits on position sizing. This is obviously what most investors strive for but everything outside of my truly best ideas tend to end up as just okay results. I do think that this process can help generate great ideas so it's not entirely worthless but I'm not confident I can pull it off well.

 

I know other investors on this forum have similar high-concentration strategies and would appreciate any advice you can give on managing risk. I'm pretty sure Ericopoly had a very similar situation but I don't believe he posts on this board anymore.

 

Thanks!

[Vish_ram]

Think in terms of layers. 

 

Bottom layer is composed of real estate, broad index funds (VTI VOO), dividend funds (VIG SCHD etc). This should meet your 70% of retirement needs.

Next is sub-sector funds depending on risk/return (XLF to XLK…VUG etc). This should meet 25% of your needs. Next is extremely safe stocks (BRK etc). All this should cover 100%.

 

On top of it, take crazy risk on multiple things. Even with 100% capital loss on one, you sleep ok. If you do really good on one, take some capital and add to bottom most layer. 

[Rainier]

Maybe pick a position size amount say $10K or $100K, whatever makes sense. And then just buy lots of smaller positions opportunistically.
 

I would wager that I’m a lot younger than you and probably not nearly as much experience investing. So, I’m probably saying something really obvious. But I had a similar situation recently. I had a position that I went all in on (for me) which was probably 10-15% of my net worth when I entered it and it grew to be about a 35-40%.
 

I felt it was time to extract myself, so I sold and I’ve been just buying different things at about 0.5% to 1%. I’ve been buying things on dips or buying special situations. Basically sort of build your own fund.
 

Obviously you have to get comfortable with the fact that you can’t know the companies inside and out as well as you did the one that was 100% of your portfolio. But you can get a decent idea with some research and your exposure isn’t high in case you miscalculate something.

 

But I can’t imagine just buying an index and going to sleep. The investment research process is actually fun, so I’m trying to balance capital protection for my family with this activity that I really enjoy doing.

 

For my personal use case, I feel like this will only really work if the positions are held over a long time horizon. So, I’m trying to condition myself to never sell this basket of small positions.

 

However, in my case, I would happily get back into a very large position if the right situation presented itself. 
 

Probably didn’t tell you anything you haven’t already thought of.

[Gamecock-YT]

Take what you can’t stand to lose and put it something safe and don’t touch it. Simple enough unless this whole post is some humblebrag exercise.

[73 Reds]

18 minutes ago, Gamecock-YT said:

Take what you can’t stand to lose and put it something safe and don’t touch it. Simple enough unless this whole post is some humblebrag exercise.

Agreed.  Do precisely what you do now, albeit with less of your overall capital that you couldn't stand to lose.  Personally I've been in your shoes for a long time and didn't change anything once that time arrived.  

[Milu]

1 hour ago, Kupotea said:

Hi everyone,

 

I'm in this unique situation that I'm hoping to get some honest feedback on. I have the enviable problem that capital preservation is more important to me now than growing my portfolio.

 

The challenge is, when I look at my historical investment returns for the last 8 or so years (I've invested for longer but it didn't really click until then) you would basically see these periods of extreme out performance during which I have a large percentage of my portfolio (usually 50%-100%) in a single stock or a basket of highly correlated stocks and then periods of pretty average or even below-average performance where I have a diversified portfolio of investments that I feel good about but they're not on the same level as my "high-conviction" ideas. I tend to only get a truly great investment idea every 1-3 years.

 

So, basically all my outperformance is from highly concentrating in my best ideas but I'm fully aware that eventually this strategy will blow up. Not because I invest in risky companies or use leverage but because I'm bound to eventually miss analyze something important or wake up one morning to some unforeseen black swan. I also have a family now unlike when I was younger and more money than we need to support our lifestyle so capital preservation and to a lesser extent income generation really should be the priority over growth.

 

My top ideas to fix this are:

 

1) Invest everything in some sort of balanced indexed portfolio or find someone else to manage the money. The thought of this kind of bums me out as I really do like investing and it feels like I have a very lucrative skill that I'm just wasting. Psychologically though, by separating myself from investing I know I won't be tempted to get highly-concentrated when I get really excited by an idea. Sort of a take your chips off the table and go home approach. 

 

2) Broad market index as the default but then set an arbitrary portfolio limit (25%?) for my truly high conviction/uncorrelated ideas. Find someway to enforce this limit (maybe make my wife have the password to our brokerage account and place the trades for me?). This seems like the most logical strategy but I'm worried that from a practical standpoint I'll get too bored only making an investment decision once every year or so and that will lead me to forcing ideas I'm not 100% confident in.

 

3) Due what normal investors due and try to create a more diversified portfolio of companies with stricter limits on position sizing. This is obviously what most investors strive for but everything outside of my truly best ideas tend to end up as just okay results. I do think that this process can help generate great ideas so it's not entirely worthless but I'm not confident I can pull it off well.

 

I know other investors on this forum have similar high-concentration strategies and would appreciate any advice you can give on managing risk. I'm pretty sure Ericopoly had a very similar situation but I don't believe he posts on this board anymore.

 

Thanks!

I would say the 8 years you have been investing properly is not really enough time to distinguish between skill and luck, especially if you are typically highly concentrated like you said. Either way it seems like you have won the game and are in capital preservation mode now so great job. I expect I will be in a similar position in about 8 years when I turn 50. While not as concentrated as you seem to be I would still define myself as a concentrated investor (top 3 positions are 18%, 16% and 12% of net worth respectively. Once I get to the preservation stage I will likely go index fund for about 80% and maybe keep 20% to play around with. Perhaps you can do something similar?

[brobro777]

Dude there is probably bigger risk in straying away from what brought you success and doing stuff you didn't do before

 

I mean if what you did in the past that was successful isn't working no more then yea you should change but if it's not broke then you should stick with it

 

As for concentration, there's been plenty of rich guys who lived their entire lives disgustingly rich concentrated on one thing, no?

 

 

[Kupotea]

1 hour ago, 73 Reds said:

Agreed.  Do precisely what you do now, albeit with less of your overall capital that you couldn't stand to lose.  Personally I've been in your shoes for a long time and didn't change anything once that time arrived.  

Appreciate the feedback and i’m aware it comes off as a humblebrag but genuinely wasn’t sure how to handle this. So from a practical standpoint put whatever we need in something safe and have a separate portfolio of whatever is left over that i continue to run as normal. This is so obvious i feel like an idiot for not thinking of it. 

Any thoughts on rebalancing the self managed portfolio over time? Like once the self managed portfolio gets big enough move it to the “safe” portfolio and then enjoy a higher annual spend at that point in time. I feel like i may be overthinking things…

[73 Reds]

52 minutes ago, Kupotea said:

Appreciate the feedback and i’m aware it comes off as a humblebrag but genuinely wasn’t sure how to handle this. So from a practical standpoint put whatever we need in something safe and have a separate portfolio of whatever is left over that i continue to run as normal. This is so obvious i feel like an idiot for not thinking of it. 

Any thoughts on rebalancing the self managed portfolio over time? Like once the self managed portfolio gets big enough move it to the “safe” portfolio and then enjoy a higher annual spend at that point in time. I feel like i may be overthinking things…

@Kupotea if you want my thoughts on rebalancing, why sell something that is working, pay taxes, and then reallocate the remaining proceeds into something that doesn't work as well?

[Spooky]

I would work backwards from what you think you will need for a modest retirement using the 4% rule. Then, depending on how much investing runway you have, put the money in index funds / S&P 500 that will, hopefully, compound to that amount. Then everything else you have is gravy and put it in your best ideas!

 

My spouse also has totally separate accounts from me that just dollar cost averages through a robo advisor (Wealthsimple) so that if I royally screw up it doesn't affect this portfolio. 

 

 

[Red Lion]

It’s easy to stop concentrating, it’s just really hard to continue achieving outperformance. 
 

Want to stop concentrating? Maybe buy an index and then leave 15-20% to concentrate on your best ideas? 

[WayWardCloud]

3 hours ago, Kupotea said:

Appreciate the feedback and i’m aware it comes off as a humblebrag but genuinely wasn’t sure how to handle this. So from a practical standpoint put whatever we need in something safe and have a separate portfolio of whatever is left over that i continue to run as normal. This is so obvious i feel like an idiot for not thinking of it. 

Any thoughts on rebalancing the self managed portfolio over time? Like once the self managed portfolio gets big enough move it to the “safe” portfolio and then enjoy a higher annual spend at that point in time. I feel like i may be overthinking things…

 

Here's an idea.

 

Separate accounts at separate brokers (your wife hold the password to the safe one if needed) with a all world stocks ETF on one side and complete freedom for you to stock pick and concentrate guild free on the other. You can set up a ratcheting rule-based system for yourself (write it down very clearly so you won't be tempted to change the rules later).

 

In this example you start with $1M in each portfolio.

Every time the actively managed portfolio ever reaches x3 the balance of the passive one you have to rebalance to 50/50.

So let's say sometimes in the future you hit 1.5M the safe portfolio and 4.5M in the active portfolio, you transfer some of the money to go to 3M / 3M.

The rule only goes one way : if the active portfolio underperforms the passive one and ends up 3X smaller you do not rebalance.

The important point is using a ratio between the funds rather than a set dollar amount.

Do this only if the original amount in safe portfolio already more than covers your capital preservation needs forever.

The downside is it's probably not tax efficient (depends which type of accounts you have).

It doesn't have to be 3x, pick the ratio that feels right after simulating scenarios (both where you outperform AND underperform) this is more of a gut check than math.

Basically we're creating a ratchet that eliminates both the risk of losing what you can't afford to lose and the risk of wasting your wonderful stock picking talent.

 

Hopefully this helps!

Edited June 6, 2025 by WayWardCloud

[Kupotea]

31 minutes ago, WayWardCloud said:

 

Here's an idea.

 

Separate accounts at separate brokers (your wife hold the password to the safe one if needed) with a all world stocks ETF on one side and complete freedom for you to stock pick and concentrate guild free on the other. You can set up a ratcheting rule-based system for yourself (write it down very clearly so you won't be tempted to change the rules later).

 

In this example you start with $1M in each portfolio.

Every time the actively managed portfolio ever reaches x3 the balance of the passive one you have to rebalance to 50/50.

So let's say sometimes in the future you hit 1.5M the safe portfolio and 4.5M in the active portfolio, you transfer some of the money to go to 3M / 3M.

The rule only goes one way : if the active portfolio underperforms the passive one and ends up 3X smaller you do not rebalance.

The important point is using a ratio between the funds rather than a set dollar amount.

Do this only if the original amount in safe portfolio already more than covers your capital preservation needs forever.

The downside is it's probably not tax efficient (depends which type of accounts you have).

It doesn't have to be 3x, pick the ratio that feels right after simulating scenarios (both where you outperform AND underperform) this is more of a gut check than math.

Basically we're creating a ratchet that eliminates both the risk of losing what you can't afford to lose and the risk of wasting your wonderful stock picking talent.

 

Hopefully this helps!

This is pretty much what i’m going to do. Thank you and to everyone else for the feedback I really appreciate it!

 

To those wondering why i would change up a working strategy i get it. If it was just my own money I wouldn’t change a thing but the thought of possibly blowing up my kids futures fills me with dread. Can’t put a price on piece of mind

[SharperDingaan]

Ever the heretic, look at this differently. Good at concentration diminishes the bigger the portfolio gets, as even a small adverse 10% swing now becomes the size of the average salary. It becomes hard to manage what is really just a small change in volatility.

 

The solution is to periodically sell off and reduce the portfolio to some minimum size appropriate to the current market. The surplus funds paying off mortgage or going into prefs and bonds for income. F*** **  tommorow, and you still walk away with both something in the bank, and a higher cash flow every month.

 

As life and interests change, change the size of the portfolio to match.

 

SD

 

Edited June 7, 2025 by SharperDingaan

[WayWardCloud]

2 hours ago, Kupotea said:

This is pretty much what i’m going to do. Thank you and to everyone else for the feedback I really appreciate it!

 

To those wondering why i would change up a working strategy i get it. If it was just my own money I wouldn’t change a thing but the thought of possibly blowing up my kids futures fills me with dread. Can’t put a price on piece of mind

You're welcome! Peace of mind is priceless, enjoy.

If you feel like sharing your current holdings into the "share your portfolio" thread and/or if in the future you feel like sharing your next high conviction idea I think it would be a nice way to give back to the forum. We need to get rich too 

[Ver]

 

Agreed with gamecock and reds, take whatever % of the assets you and your wife want to preserve and just sit it in t-bills. Doing all this other stuff just adds complexity and will hurt your performance. It's better to simplify and focus what you are good at while removing possible sources of worries. 

 

All these problems are solved at the investing principles level, of matching the degree of concentration with the degree of understanding the company's future cash flows. Losing sleep or worrying? A clear sign you're too heavily concentrated for the degree that you understand.

 

Put another way, if you had 95% of your assets in your own company with an amazing business model, low valuation, that you knew with certainty would produce oodles more cash in the future, who cares about the concentration. 

 

Best of luck and congrats on the success thus far!

[mattee2264]

I think you're very wise to recognize that your outperformance represents a mix of luck as well as skill and there is a risk of future underperformance that you are the luxury of insuring against by being more diversified as well as increasing your fixed income exposure. 

 

But if you are 70-80% invested in index funds and short term bonds (and I'd also add equity income funds to that mix) then there is plenty of room to add a little to returns by investing in 3-5 high conviction ideas. It may even reduce risk if those ideas are very uncorrelated with market returns. 

 

 

[Kupotea]

10 hours ago, WayWardCloud said:

You're welcome! Peace of mind is priceless, enjoy.

If you feel like sharing your current holdings into the "share your portfolio" thread and/or if in the future you feel like sharing your next high conviction idea I think it would be a nice way to give back to the forum. We need to get rich too 

I am very heavily invested currently in gold miners and royalty cos. They have been on a tear this year and may be due for a pullback but you still have names trading at 30%+ FY26 fcf yields with current spot prices. I personally believe we’re in a secular bull market due to global fiscal largesse, fiscal repression, diversification away from USD assets by central banks and European pension funds. $4000 gold in 2026 is not out of the question and I could see a bit of a frenzy develop in the gold equities space as institutional managers seek to catch up to a very under-owned sector.

 

My top two picks are:

Aris Mining (jurisidiction risk being based in colombia but amazing assets at a stupid cheap valuation and i expect colombia to swing right with the federal election next year) 

Equinox Gold (poor execution has crushed investor confidence in the stock but build out of their two new tier 1 mines are almost complete and the stock is silly cheap plus liquid. You can buy jan 27 contracts at like $.70 for the $12,50 strike price while at a 1x nav or 6-8x ebitda this company should be in the $20+ price range by then)

Easiest option though is to just buy the GDX etf.

I did recently recommend Vox Royalties but i’m selling out of it due to some litigation risk.

[73 Reds]

13 hours ago, Kupotea said:

This is pretty much what i’m going to do. Thank you and to everyone else for the feedback I really appreciate it!

 

To those wondering why i would change up a working strategy i get it. If it was just my own money I wouldn’t change a thing but the thought of possibly blowing up my kids futures fills me with dread. Can’t put a price on piece of mind

@Kupotea you need to do what's best for your own peace of mind.  That said, I agree with @SharperDingaan.  Most of us have or had families and are or were in your shoes at one time.  For me, the issue comes down to not wanting to needlessly sacrifice performance.  Consider all of your sources of wealth generation, including your and/or your spouse's jobs.  Have you retired from active employment and do you live solely off your investments?   If not, rather than adjusting your investments, perhaps adjusting your lifestyle just a bit so that you are saving more and spending less is an option.  Figure out what you are really good at when it comes to investing and focus on that. Sure investing involves a certain amount of luck but 8 years of solid outperformance is much more than luck - particularly in investments like gold and royalty companies which you properly identified.   Remember, stock indices can drop and drop by a lot and for longer than you anticipate (just ask Blake, LOL).  If you are concerned about a permanent impairment of capital there are plenty of individual stocks and industries that aren't going away anytime soon.  You can own companies with monopolistic-like characteristics with superior management that understands how to allocate capital.  Look no further than the namesake of this board for two such stocks that will likely beat any broad based index over time.    

[Marco Van Basten]

11 hours ago, Ver said:

 

Agreed with gamecock and reds, take whatever % of the assets you and your wife want to preserve and just sit it in t-bills. Doing all this other stuff just adds complexity and will hurt your performance. It's better to simplify and focus what you are good at while removing possible sources of worries. 

 

All these problems are solved at the investing principles level, of matching the degree of concentration with the degree of understanding the company's future cash flows. Losing sleep or worrying? A clear sign you're too heavily concentrated for the degree that you understand.

 

Put another way, if you had 95% of your assets in your own company with an amazing business model, low valuation, that you knew with certainty would produce oodles more cash in the future, who cares about the concentration. 

 

Best of luck and congrats on the success thus far!

This is just wrong.  You cannot sit in T-bills if you would like to preserve capital in real terms after tax.  Historically, T-bills returned inflation before tax, and negative 1% after inflation and taxes.  T-bills are NOT a store of value nor are they preservation of capital.  They are a destroyer of value over time.  Exception is countries like Switzerland, which abhor inflation, and where t-bills can actually be a store of value.  However even in Switzerland, wealth tax might result in your wealth declining if you hold it in T-bills.  Unfortunately, one has to invest in productive assets in order to outpace inflation after tax.  Unfair, but it is a fact.  

[Kupotea]

4 hours ago, 73 Reds said:

@Kupotea you need to do what's best for your own peace of mind.  That said, I agree with @SharperDingaan.  Most of us have or had families and are or were in your shoes at one time.  For me, the issue comes down to not wanting to needlessly sacrifice performance.  Consider all of your sources of wealth generation, including your and/or your spouse's jobs.  Have you retired from active employment and do you live solely off your investments?   If not, rather than adjusting your investments, perhaps adjusting your lifestyle just a bit so that you are saving more and spending less is an option.  Figure out what you are really good at when it comes to investing and focus on that. Sure investing involves a certain amount of luck but 8 years of solid outperformance is much more than luck - particularly in investments like gold and royalty companies which you properly identified.   Remember, stock indices can drop and drop by a lot and for longer than you anticipate (just ask Blake, LOL).  If you are concerned about a permanent impairment of capital there are plenty of individual stocks and industries that aren't going away anytime soon.  You can own companies with monopolistic-like characteristics with superior management that understands how to allocate capital.  Look no further than the namesake of this board for two such stocks that will likely beat any broad based index over time.    

I have a lot of respect for Watsa and Buffet but I’ve never been comfortable investing in financial institutions or large conglomerates. I get that you're investing in management more than the assets but I can’t hold something when I don’t feel like I don’t know all the facets of the business. Heresy around these parts i’m sure.

 

I’m confident in my investing abilities but  there’s always unforeseen edge cases that can kill you. Smarter guys than me have blown up their portfolios because they unknowingly over allocated to some fraudulent business or it turns out xyz company’s products cause cancer or whatever.

 

I’m also just not talented enough to find multiple winning investments at the same time. I get like one really good idea every couple of years and that’s actually fine but it’s too much concentration risk or conversely not enough juice if i limit that to like a 15% position.
 

Taleb has this whole (self-indulgent) book on how if you open up your portfolio to financial ruin via tail risk then mathematically it will eventually blow up. I need to do something to mitigate that.

[gfp]

I'm just glad I finally got to hear someone characterize Berkshire Hathaway as "too risky" !

 

 

[73 Reds]

28 minutes ago, Kupotea said:

I have a lot of respect for Watsa and Buffet but I’ve never been comfortable investing in financial institutions or large conglomerates. I get that you're investing in management more than the assets but I can’t hold something when I don’t feel like I don’t know all the facets of the business. Heresy around these parts i’m sure.

 

I’m confident in my investing abilities but  there’s always unforeseen edge cases that can kill you. Smarter guys than me have blown up their portfolios because they unknowingly over allocated to some fraudulent business or it turns out xyz company’s products cause cancer or whatever.

 

I’m also just not talented enough to find multiple winning investments at the same time. I get like one really good idea every couple of years and that’s actually fine but it’s too much concentration risk or conversely not enough juice if i limit that to like a 15% position.
 

Taleb has this whole (self-indulgent) book on how if you open up your portfolio to financial ruin via tail risk then mathematically it will eventually blow up. I need to do something to mitigate that.

Well, as another poster stated, try hard not to overthink it.  In one manner I think we're alike - I directly own and control the majority of my investment assets because they are not publicly owned.  If they blow up its solely on me and there is no one else to blame.

[Gregmal]

Can’t you just keep your current allocation and then cap position size? Which over time will free up capital gradually and diversify? 

[SharperDingaan]

Couple of things .....

 

Getting rich is not the same as staying rich; staying rich is purely about generating more after tax cash flow than you spend. Could be via employment, pensions, interest, dividends, option premiums, gains. etc. The more reliable the cash flow the better, if your common pays a rising dividend over time so much the better.

 

Reduce your spend (by paying off your mortgage, margin, etc.), and you also reduce the needed amount of after tax cash flow. Painless when you systematically adjust your  capital requirement as the investing climate changes, and apply that surplus against debt. 

 

CAGR matters; aim for 7.2%+ before tax (a double in 10 years), and the longer the historic measuring period the better. Simply 'cause if at age 65 you spent down all of today's capital over the next decade ... you could expect to reach age 75 with the same amount of capital you had when you were 65. Dividends, interest, premiums every year ... all bonus. Your actual cost is just the cost of inflation on that initial principal over 10 years.

 

Point is ... it's primarily a change in mindset. Nothing complicated, and in most cases it's pretty hands off.

 

Time goes into enjoying family/friends/travel instead.

 

SD