Diversification is not for everyone. While most people need at least some degree of diversification of their assets, there are some who have profitably shunned it.

For a start, I doubt Jeff Bezos was much diversified when he started his career, nor Sir Robert Jones. In fact, from all accounts these two probably had everything in their businesses early on, property investment in the case of Sir Robert; IT for Bezos.

This high concentration of wealth is common for entrepreneurs. Diversification is not for them as they are determined to succeed – they live, eat and breath their enterprises and are prepared to let everything hang on just one thing.

Many successful entrepreneurs don’t think “diversify” and, for a period at least, run their businesses as hard as they can. It may be nice to have a bit of diversification with cash or other assets to fall back on, but if you want to become really wealthy you probably won’t get there by diversifying – you will need to go all in, boots and all, and be the very opposite of diversified.

Most successful entrepreneurs are like this in their early years – they own their businesses and not a lot else. Society needs people who mortgage their houses and/or scrape together every last dollar to throw at a new enterprise.

They create wealth and jobs for all, and when they are successful, they ought to be applauded. They forgo the safety of diversification and work hard with everything at risk.

Higher-risk settings

Those who do not have a burning business idea, or do not have the inclination to own a business, may form a second group who also choose concentration of their assets. These people take their KiwiSaver or other funds to a higher risk setting, meaning they go for an aggressive portfolio, one with 90 per cent in shares or perhaps even more.

Many people will want some diversification, but there are plenty of younger people who could most profitably be aggressively invested with a portfolio that consists almost solely of shares in businesses.

As an example, take a 35-year-old trying to decide the amount of risk she should take with her KiwiSaver and other investments. Imagine that this person is a lawyer and good at her job – she’s unlikely to be without an income. She is well insured, owns her own house and would not expect to be able to withdraw her KiwiSaver for 30 years.

Someone like this could easily have her KiwiSaver in an aggressive fund with 90 per cent in international shares (the most volatile asset class but probably the best returns).

If she asked for advice on this, most people would say it was a good strategy – very few would say she should be in a balanced fund or similar. A high concentration of international shares will be volatile, of course, but the ownership of good shares (especially in technology) listed on the share market is bound to give good returns over a long period of time.

Value of hindsight

These returns may not be as good as owning your own business (assuming it’s successful), but they can still be excellent. In fact, you could have bought shares in the business that Jeff Bezos started – Amazon. Bezos listed Amazon about 27 years ago and since then has given shareholders returns of 33.5 per cent per annum. Other companies have also given high returns: Apple, Microsoft, Alphabet, Infratil and Mainfreight, for example.

Anyone who would be happy to run the risk of owning their own business ought to be happy trying to seek out a few of these high performers and concentrate their investment accordingly.

Of course, it will be a lot easier to do this with hindsight than it ever could be to pick them from scratch. Nevertheless, if you owned (say) 30 stocks, this would probably see you doing very well over 30 years provided you are never rattled out of the market by volatility.

The amount of diversification you should have depends on three main things:

1. The length of time you are investing for. A 30-year-old saving for the deposit for a house in two years would invest much more safely than a 35-year-old saving for retirement in 30 years. This second person with a time frame of 30 years could afford a lot more risk (ie more shares).
2. Your financial capacity. This is the ability you have to withstand financial shocks like the loss of your job or a health issue. Having insurance for key risks also increases your financial capacity. Usually, the better your financial capacity the more risk you can take.
3. Your psychological profile. There are some people who worry about their money and who react badly when markets slump. These people who might tend to panic and sell ought not to have portfolios with large percentages of shares – they have a high chance of being rattled out of the market in the next big crash.

Younger people should be able to tolerate less diversification than older people. Generally, a high concentration to shares in a fund or portfolio ought to be good for younger people and they should take advantage of their most important asset – time.

These higher concentrations to growth assets (shares and property) will give better returns than a portfolio that has large amounts in cash and fixed interest. A portfolio with most (or even all) allocated to shares will give excellent returns if you have the time and fortitude to let it run.

The information contained in this article is general in nature and is not intended to be personalised financial advice. Before making any financial decisions, you should consult a professional financial adviser. Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to buy, sell or retain a regulated financial product.