The “Fewer and Deeper” Strategy For Portfolio Optimization
Interested in portfolio optimization with my “Fewer and Deeper” strategy? Let’s break down how it works.
Initial Phase
To fix the issue of over-diversification, I propose starting with a small investment in something you want to explore.
For example, I’ve been aiming to limit my exposure to any single real estate investment to only 1% of my net worth. That rule has served me well, and you can apply it to your investment strategy. You can start small with a $5,000 investment with one operator.
Small-dollar investing helps you diversify and try a new asset class or a new operator. You can experiment with relatively small amounts to get comfortable before moving on to the next phase.
Growth Phase
As time passes, you study that particular investment, work out how it works, take note of what impacts which, and log the returns. It will feel like you’re doing homework again—and you are—but you need to document everything if you want to break down the investment into its working parts.
Commitment Phase
Once you gain familiarity and comfort and have identified which investments offer the best returns, it’s time to double down on your winners. Instead of spending the majority of your time looking for the next investment, you spend it deciding on allocating more capital to your high-performing assets.
Depending on your risk tolerance and specialization, you can scale up investments to 5% of your net worth or more. Going back to my previous personal example, once I have enough first-hand experience on how the operator or the investment works, maybe I’ll bring the total up to around $20k to $50k, perhaps more as time passes.
Some of my real estate investments now make up 5-7% of my net worth. None of them started that way.
Risk and Asset Management
Or, if I don’t like the results of a particular investment, I can just pull out or leave my small initial investment there.
Diversification protects you from one asset or asset class crashing. And even if some of your holdings crash, dollar-cost averaging usually brings down prices (and we love DCA in real estate).
However, the initial phase of the “Deeper and Fewer” strategy offers a smart way to find the investments you want to go heavier on without needing DCA to save the day.
I’ve also found that when you have less money at stake, you’re more objective about understanding the investment’s performance than focusing on the potential ROI alone since you’d have less to lose.
Long-Term Wealth Building
Once you have a portfolio of fewer and deeper investments that are certified winners, your investments start to work harder for you.
As mentioned earlier, fewer high-yield investments significantly reduce the time it takes to manage them effectively. Being an expert in the asset classes you choose gives you an edge, allowing you to make timely and well-informed moves whenever you need to and even anticipate market trends as they come. With luck and consistency, this portfolio optimization can reliably generate wealth over long investment periods.
The “Fewer and Deeper” strategy also puts you in an excellent position as time goes by because, to be perfectly blunt, no one’s getting any younger. The older you get, the more difficult it will be to manage your investments. A few well-researched investments in asset classes you’re familiar with can ease the burden of management in your golden years.
