Hot Takeaway: Concentration in 1 Stock Can Be Just Fine

Concentration in one stock can be alright under the right circumstances, and far better than buying a bunch of poor-performing stocks.

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Now before we get into this discussion, it’s important to note that overall, diversification is usually the best way to achieve long-term capital gains. Unless you’re a financial advisor or investor for a living, usually diversification will provide you with solid growth while reducing your risk.

However, there are a few scenarios under which concentration in even one stock can be just fine. Especially during volatile economic times. So let’s get into what those circumstances might be, and a stock to consider.

When it’s just fine

If you’re considering having your investments in just one stock, there are certainly scenarios in which this works. First and foremost, however, investors will need to have a deep understanding of the company, its industry, and its prospects. In this case, concentrating your investment in that stock can be a strategic move.

With all that research, you might have high conviction in the company’s future performance based on thorough analysis of its fundamentals, management team, competitive advantage, and market position. And that future looks like it aligns with your overall investment strategy.

What’s more, during these tougher economic times, other investment opportunities can seem way less attractive. And investors may not be able to find other investments that meet their criteria. In this case, concentrating on a single stock may be preferable to diversifying into lesser-quality investments.

But overall, again you want to make sure this investment aligns with your goals. And those goals might include exceptional growth potential. So if you believe the stock has exceptional growth potential compared to other options in the market, concentrating your investment in it can potentially maximize your returns.

A strong option

If you’re looking at the market and not clear on which stock might be the one to consider, there are a few out there. And one that might align with a long-term investor who is looking for strong growth is Constellation Software (TSX:CSU).

CSU stock operates a decentralized structure, acquiring and managing a diverse portfolio of software companies. This model allows them to target niche markets and build deep expertise within each area. 

CSU stock also has a strong track record of acquiring and integrating software companies profitably. Their disciplined approach to acquisitions and focus on operational improvements has consistently delivered shareholder value over the years. Investors with confidence in the company’s management team and acquisition strategy may consider concentrating their investment in CSU stock.

What’s more, the software industry, particularly niche vertical markets, is expected to continue growing as businesses increasingly adopt technology solutions to improve efficiency and productivity. CSU stock’s focus on these markets positions it well to benefit from this growth trend. Investors who are bullish on the software industry as a whole may find CSU stock an attractive investment option for concentration.

Bottom line

So while diversification can certainly be key, and there are other companies that investors can consider as well, don’t believe that concentration is always a bad thing. Investing in a company like CSU stock long term can actually provide better growth than investing in a diverse range of poor-performing stocks. Yet as always, meet with your financial advisor before making any big financial decisions.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool recommends Constellation Software. The Motley Fool has a disclosure policy.

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