Diversification vs Concentration - Which Strategy Reduces Risk Better

A few months ago, an NRI in our WhatsApp community asked a question that sparked a heated debate: "My friend made 400% returns by putting everything in one tech stock. Should I do the same?"

The responses ranged from "absolutely yes" to "that's how people go broke." Both sides had valid points. 

And this tension between concentration and diversification is one of the oldest debates in investing.

At Belong, we've spent years helping NRIs navigate this exact question. The answer isn't as simple as picking one strategy. 

It depends on your knowledge, risk tolerance, time horizon, and frankly, how well you sleep at night when markets crash.

This guide breaks down everything you need to know. We'll look at the Nobel Prize-winning research, Warren Buffett's contrarian view, real-world disasters, and what actually makes sense for NRIs managing money across borders.

What the Numbers Actually Say

Let's start with a sobering statistic that changes how most people think about this debate.

A J.P. Morgan analysis found that more than 40% of companies ever listed in the Russell 3000 Index experienced a "catastrophic loss." That means a 70% decline in price from peak levels that was never recovered.

Think about that. If you pick a single stock and hold it long enough, there's nearly a coin-flip chance it will eventually lose 70% or more of its value permanently.

The Russell Investments research shows another striking pattern. Stocks that were among the top 20% performers over any five-year period went on to lag the market 86% of the time over the next ten years.

So even if you pick a winner, the odds of it staying a winner are slim.

👉 Tip: Before concentrating your portfolio in any single stock, ask yourself: "Would I be financially okay if this dropped 70% and never recovered?"

The Nobel Prize Winning Argument for Diversification

In 1952, a 25-year-old economist named Harry Markowitz published a paper that would later earn him the Nobel Prize. His insight was simple but revolutionary.

Modern Portfolio Theory showed that a diversified portfolio is less volatile than the sum of its individual parts. You can actually reduce risk without sacrificing expected returns.

Here's the key insight: different assets don't move in perfect unison. When one goes down, another might go up. This smooths out your overall returns.

Markowitz's quote became legendary in finance circles: "Diversification is the only free lunch in investing."

The math works because of correlation. If Stock A and Stock B both fall 20% at the same time, you lose 20%. But if Stock A falls 20% while Stock B rises 10%, your average loss is only 5%.

For NRIs, this matters even more. You're already dealing with currency risk, political risk, and the complexity of managing assets across borders. Adding concentration risk on top is like stacking risks unnecessarily.

Warren Buffett's Contrarian View

Now here's where it gets interesting. The world's most successful investor disagrees with conventional wisdom.

Warren Buffett has said: "Diversification is protection against ignorance. It makes little sense if you know what you're doing."

In his 1993 letter to Berkshire Hathaway shareholders, Buffett wrote: "If you are a know-something investor, able to understand business economics and to find five to ten sensibly-priced companies that possess important long-term competitive advantages, conventional diversification makes no sense for you."

His logic is compelling. Why dilute your best ideas with your mediocre ones?

Looking at Berkshire Hathaway's portfolio, roughly 80% of its $297 billion portfolio is invested in just nine stocks. His top five holdings alone comprise about 70% of his portfolio value.

But there's a crucial caveat most people miss.

Buffett also advises average investors to do the exact opposite. For his wife's inheritance, he recommended putting 90% in a low-cost S\&P 500 index fund and 10% in short-term government bonds.

The difference? Buffett has spent 70+ years analyzing businesses full-time. He has access to management teams, industry experts, and decades of pattern recognition that most investors simply don't have.

👉 Tip: If analyzing businesses isn't your full-time job, concentration is a much riskier bet than it was for Buffett.

How Many Stocks Do You Actually Need?

Research on this has evolved significantly over the decades.

The pioneering 1968 study by Evans and Archer suggested 8-10 stocks were enough for adequate diversification. But more recent research tells a different story.

A comprehensive literature review found:

The CFA Institute research found it varies by portfolio style:

The key finding: a large-cap portfolio of 10 stocks has about 20% volatility. Adding 30 more stocks only reduces that to 17%. But for small-cap portfolios, the same 30 additional stocks cuts volatility by 7 percentage points.

For most NRI investors, holding 20-30 well-chosen stocks across different sectors and geographies captures most diversification benefits. Beyond that, you're adding complexity without much risk reduction.

The Real-World Disasters of Concentration

Theory is one thing. Real losses hit differently.

Boeing (2020): Investors who held concentrated positions watched their investment fall to around $95 per share from its all-time high. The broader market has largely recovered. Boeing still hasn't returned to previous levels years later.

Meta (2022): The stock lost 64% of its value in a single year. Even after rising 149% in the first nine months of 2023, it was still down 13% from where it started.

Intel (2024): Once a tech titan, Intel saw mass layoffs while its stock price crashed. Employees holding company stock faced the dreaded "double whammy" of losing both their income and their savings.

Enron (2001): Perhaps the most infamous example. Employees lost both their jobs and their life savings because they held significant portions of their portfolios in company stock.

The Russell Investments analysis compared five-year returns of S\&P 500 components. While holding Apple made investors winners, owning Pfizer, Disney, or Intel resulted in negative returns during a period when the index nearly doubled with 97% cumulative returns.

Market leadership changes dramatically. The stocks driving returns today may not be the ones driving returns tomorrow.

👉 Tip: Never concentrate more than 10% of your portfolio in any single stock, including your employer's stock. The risk of losing both your job and your savings simultaneously is too high.

Why Traditional Diversification Is Changing

Here's something that should concern every investor in 2025.

BlackRock's research shows that the traditional relationship between stocks and bonds has fundamentally shifted. They used to be negatively correlated. When stocks fell, bonds typically rose. This was the foundation of the classic 60/40 portfolio.

But that relationship has broken down. Since 2022, stocks and bonds have been moving together more often. This means the diversification benefits of holding bonds alongside stocks have weakened.

The Morningstar US Market Index shows another problem. The top 10 largest constituents now consume 36% of index weight, up from 23% just five years back. So even a "diversified" S\&P 500 index fund is heavily concentrated in a handful of tech giants.

If you think you're diversified because you own an S\&P 500 fund, think again. A few companies like Nvidia, Apple, and Microsoft could disproportionately impact your returns.

This is why Morgan Stanley's Global Investment Committee is urging investors to seek maximum portfolio diversification in 2025. They recommend supplementing U.S. stocks with positions in non-U.S. equities, international bonds, real estate investment trusts (REITs), and alternative investments.

What Truly Diversifies Your Portfolio?

Diversification isn't just about owning many stocks. It's about owning assets that don't move together.

State Street's research shows gold has a 0.00 correlation with the S\&P 500 and just 0.09 correlation with bonds over long periods. During market stress, these correlations often turn negative, meaning gold rises when other assets fall.

Here's how different asset classes correlate with each other:

For NRIs specifically, true diversification means spreading across:

1. Asset classes: Stocks, bonds, gold, real estate
2. Currencies: USD, INR, AED
3. Geographies: India, UAE, US, Europe
4. Time horizons: Short-term FDs, medium-term debt, long-term equity

The World Gold Council analysis suggests that when stock-bond correlations are positive (as they are now), the optimal allocation to gold needs to increase to maintain the same portfolio risk level.

👉 Tip: Don't confuse owning many stocks with true diversification. If all your stocks are Indian IT companies, you're still concentrated in one sector and one country.

The NRI Diversification Advantage

As an NRI, you actually have a unique advantage when it comes to diversification.

You're already living and earning in one economy (UAE, US, UK) while maintaining financial ties to another (India). This natural geographic spread is something domestic investors have to work harder to achieve.

But many NRIs make a mistake: they either concentrate everything in their country of residence or everything in India. Neither approach is optimal.

Here's a smarter framework for NRI portfolio diversification:

Emergency Fund (6-12 months expenses) Keep this in your country of residence. You need it accessible without currency conversion delays.

Short-term Goals (1-3 years) Use FCNR deposits or GIFT City USD FDs to avoid currency risk while earning better rates than local savings accounts.

Medium-term Goals (3-7 years) A mix of debt mutual funds, hybrid funds, and conservative equity allocations.

Long-term Goals (7+ years) This is where equity exposure makes sense. Diversify across Indian large-caps, international funds, and emerging market exposure.

The key insight: your diversification should serve your goals, not just follow a formula.

GIFT City: The Modern Way to Diversify

GIFT City has changed the diversification game for NRIs.

Before GIFT City, NRIs had limited options. You could invest in India (with rupee exposure and regulatory complexity) or invest abroad (with potentially higher taxes and no India exposure).

GIFT City offers something new: invest in USD-denominated products regulated by India but with international tax treatment.

Here's what's available:

USD Fixed Deposits Earn 4.5-6% returns in USD without rupee depreciation risk. Principal and interest are protected from INR volatility.

GIFT City Mutual Funds Access India's growth story through USD-denominated funds. No capital gains tax for NRIs from zero-tax jurisdictions like UAE. Funds like the Tata India Dynamic Equity Fund and DSP Global Equity Fund let you start with as little as $500.

Alternative Investment Funds For larger portfolios, AIFs in GIFT City offer access to private equity, real estate, and hedge fund strategies.

The IFSCA has reduced minimum investments from $150,000 to $75,000 for some categories, making these products accessible to more NRIs.

For UAE-based NRIs, GIFT City creates a unique tax arbitrage. Under the India-UAE DTAA, you may be able to earn returns from Indian markets without capital gains tax in either country.

👉 Tip: Use Belong's FD Comparison Tool to compare GIFT City USD FD rates across banks instantly.

When Concentration Actually Makes Sense

Despite everything we've discussed, there are situations where concentration isn't crazy.

You have deep expertise in one industry. If you've spent 20 years in pharma, you might genuinely understand drug pipelines and regulatory approvals better than any analyst. This edge could justify higher conviction.

You're building wealth, not preserving it. As Buffett says, concentration creates wealth, diversification preserves it. If you're young with high earning potential and can afford to lose it all, concentration is a calculated bet.

You have locked-in gains you can't sell. Founders with RSUs, executives with stock options, or employees with concentrated ESOP holdings may face tax consequences that make immediate diversification impractical.

You're investing play money. If you've carved out 5-10% of your portfolio as "speculation money," concentration within that slice won't destroy your overall financial plan.

But even in these cases, have a plan to diversify over time. The research is clear: concentration might make you rich, but it's also the surest way to go broke.

A Practical Framework for NRIs

Here's how we think about diversification vs concentration at Belong:

Step 1: Define Your Core Portfolio (70-80% of assets)

This should be fully diversified across:

• Multiple asset classes
• Multiple geographies
• Multiple currencies

Never concentrate your core portfolio. This is the money that funds your retirement, your children's education, and your financial security.

Step 2: Define Your Satellite Portfolio (20-30% of assets)

This is where you can take concentrated bets if you choose. Higher conviction positions, sector bets, or individual stocks you believe in strongly.

If your satellite positions work out, great. If they don't, your core portfolio protects your financial plan.

Step 3: Rebalance Regularly

Winners tend to become concentrated positions over time. A stock that's 5% of your portfolio can become 25% if it grows enough. Set annual reminders to rebalance.

Step 4: Use Tools to Track Concentration

Check your portfolio quarterly for:

• Any single stock > 10% of total portfolio
• Any single sector > 25% of equity allocation
• Any single currency > 60% of total assets

Our Compliance Compass tool helps NRIs track their overall financial position across these dimensions.

Diversification Mistakes NRIs Make

After working with hundreds of NRIs, we see these patterns repeatedly:

Mistake 1: Fake Diversification Owning five Indian IT mutual funds isn't diversification. They likely hold the same stocks (TCS, Infosys, Wipro) with slight variations. You need diversification across fund categories, not just fund houses.

Mistake 2: Ignoring Currency Risk All your assets in INR isn't diversified even if you own stocks, bonds, and real estate. If the rupee depreciates 5% in a year (which has happened multiple times), you lose 5% in USD terms regardless of asset performance.

Use the Rupee vs Dollar Tracker to understand historical currency trends before making allocation decisions.

Mistake 3: Over-diversifying into Complexity Some NRIs end up with 40+ mutual funds, FDs across 10 banks, and property in 5 cities. This isn't diversification; it's chaos. You spend more time managing paperwork than benefiting from any diversification.

Mistake 4: Concentrating in Real Estate Many NRIs have 70-80% of their net worth in Indian property. Real estate is illiquid, hard to diversify within, and comes with significant tax implications when you sell.

Mistake 5: Ignoring Your Human Capital If you work in tech, your job security is tied to the tech industry. Concentrating your investment portfolio in tech stocks compounds this risk. Diversify into sectors unrelated to your employment.

👉 Tip: Check your residential status annually. It affects your tax treatment and which diversification strategies are available to you.

What Happens When You Return to India?

Planning to return to India eventually? Your diversification strategy needs to account for this.

When you become a resident, your tax status changes. Suddenly, global income becomes taxable in India. Assets you held as an NRI may have different implications.

The RNOR status (Resident but Not Ordinarily Resident) gives you a 2-3 year window where foreign income remains non-taxable. This is the time to restructure your portfolio.

GIFT City investments can continue even after you return, since they operate under IFSC jurisdiction. This provides continuity during the transition.

Before returning, review our guide on financial mistakes returning NRIs make. Many of these relate to hasty portfolio decisions without proper tax planning.

The Bottom Line: It's Not Either/Or

The diversification vs concentration debate creates a false choice.

The research is clear: for most investors, most of the time, diversification reduces risk without sacrificing returns. The "free lunch" that Markowitz identified 70 years ago still works.

But concentration has created some of the world's greatest fortunes. If you have genuine edge, high conviction, and can afford to be wrong, selective concentration within a portion of your portfolio isn't irrational.

The winning approach for NRIs:

1. Diversify your core: Use GIFT City products, Indian mutual funds, USD FDs, and international investments to create a truly diversified base.

2. Concentrate selectively: If you want to take bigger bets, do it with money you can afford to lose.

3. Rebalance regularly: Don't let winners become accidental concentrated positions.

4. Match to your life stage: More concentration when young and building wealth. More diversification as you approach retirement.

The goal isn't maximum returns. It's returns that let you sleep at night while your money works for you across borders.

Ready to build a smarter, diversified NRI portfolio?

Join our WhatsApp community where NRIs discuss portfolio strategies, share experiences, and get answers from fellow investors and our team.

Download the Belong app to compare FD rates, explore GIFT City mutual funds, and track your investments in one place.

Sources:

• J.P. Morgan Asset Management - Concentrated Stock Position Analysis: https://am.jpmorgan.com/
• BlackRock Investment Directions Fall 2025: https://www.blackrock.com/us/financial-professionals/insights/investment-directions-fall-2025
• Morgan Stanley 2025 Market Outlook: https://www.morganstanley.com/ideas/2025-market-outlook-portfolio-diversification
• Morningstar Portfolio Diversification Guide: https://www.morningstar.com/portfolios/5-smart-ways-diversify-your-portfolio-2026
• CFA Institute Peak Diversification Research: https://blogs.cfainstitute.org/investor/2021/05/06/peak-diversification-how-many-stocks-best-diversify-an-equity-portfolio/
• State Street Gold as Strategic Asset Class: https://www.ssga.com/us/en/intermediary/insights/gold-as-a-strategic-asset-class
• Russell Investments Concentrated Stock Analysis: https://russellinvestments.com/
• Britannica Modern Portfolio Theory: https://www.britannica.com/money/modern-portfolio-theory-explained
• World Gold Council Portfolio Optimization: https://www.gold.org/

Disclaimer: This article is for educational purposes only and should not be considered investment advice. Consult a qualified financial advisor before making investment decisions. Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.