High-Performance Portfolio Optimization: Why Fewer and Deeper Wins

The Big Picture on Portfolio Optimization With The “Fewer and Deeper” Strategy: 

• • While diversification protects against downturns, excessive diversification dilutes returns, increases complexity, and leads to missed opportunities. Managing too many investments is time-consuming, costly, and makes it harder to track and optimize performance.
  • Instead of spreading capital thinly across numerous assets, portfolio optimization using the “Fewer and Deeper” approach involves starting small, gaining deep knowledge, and gradually increasing allocation to high-performing investments. This allows for better risk management, specialization, and higher returns over time.
  • A streamlined, well-researched portfolio reduces administrative burdens and enhances decision-making. As investors age, managing a few well-understood, high-quality assets ensures financial stability and sustainable growth, making wealth management more efficient.

We’ve all had the urge to buy into everything and anything that comes across our desks or computer screens. Some people collect investments like they were Magic: The Gathering cards or Warhammer 40K figurines. 

And while certain cards and figurines are viable investments, the comparisons end there. Diversification, or what I call the “more is better” mindset, has gone out of style. You no longer need to own a piece of everything to be properly diversified. Instead, you should consider the “Fewer and Deeper” investment strategy for portfolio optimization. 

The Limitations of Over-Diversification

Just like the majority of us, I love having many investment options. But if you’re anything like me during my early years, you might also get caught in the “Gotta catch ’em all” mindset.

Sure, diversification is great. It protects you when one asset class crashes. However, what most investment gurus never told us, or even those investment books we keep on our shelves, is that tracking 43 different investments in your portfolio comes with a massive headache. 

Over-diversifying your investment portfolio means mountains of paperwork during tax season and trying to make sense of everything you’ve invested. Sure, you can hire an accountant to ease the burden, but they’d probably need therapy a year after (and will charge you big bucks for the amount of headache you passed onto them). 

However, the most significant cost will not be the higher fees or the paperwork you’ll have to deal with each quarter. That would come in the form of missed opportunities. You’ll miss out on chances to capitalize on the investments that could have made better profits because you’ve spread your investment—and yourself—way too thin.

Other Disadvantages

If you’re not convinced, here are some more disadvantages of over-diversification: 

(article continues below)

Real estate investments? Awesome.

Being a landlord? Less fun.

Learn how to earn 15%+ on passive real estate investments in our free video course.

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. 

Want to compare investment property loans?

What do lenders charge for a rental property mortgage? What credit scores and down payments do they require?

How about fix-and-flip loans?

We compare the best purchase-rehab lenders and long-term landlord loans on LTV, interest rates, closing costs, income requirements and more.

Asset Class Considerations

The point of this discussion is not to stop you from diversifying but to stop you from overdoing it with surface-level knowledge. 

You can have multiple asset classes in my portfolio, but you must be confident that you only invested in what you can accommodate. It’s because each asset class has its own playbook and requires a unique approach, and juggling assets beyond what you can handle could lead to a lot of ugliness down the line. 

If you prefer alternative investments, you can look for ones related to your specialization. So, if you’re into real estate, you offer private money loans for real estate ventures. You could also invest in real estate syndications, REITs (Real Estate Investment Trusts), or fractional ownership in commercial properties. You can also consider real estate crowdfunding platforms, tax lien investing, or developing rental properties.

Or, if you don’t want to invest in diverse properties without significant capital requirements, you can join our Co-Investing Club. Instead of ponying up $50k to $100k for individual real estate investments, you can start with $5,000 per deal. The Club invests in all kinds of assets, including private partnerships, private notes, real estate syndications, real estate equity funds, and secured debt funds. Even better, we take all kinds of investors, not just accredited ones. 

Oh, and once you’re in the club, you’re a member in name and practice. That means you have a say in what assets we invest in, participate in discussions, and vet potential investments as you see fit. Members meet monthly through video call, so you don’t need to fly in. 

SparkRental’s Co-Investing Club aims for 15%+ returns as the average annualized return on equity investments or 10-12% interest on debt investments. If you have any more questions, feel free to visit our page. 

Disadvantages of The “Deeper and Fewer” Strategy

It would be disingenuous of me to promote the “Deeper and Fewer” strategy without discussing its downsides. So, here they are in all their glory: 

• Higher Concentration Risk: Tying up your money in a few assets under a similar market sector or industry puts you at risk when they underperform.
• Deep Due Diligence Required: You must stay on top of your investments in every conceivable way possible. Preliminary research and ongoing monitoring will take the most time.
• Liquidity Issues: It might be difficult to turn your assets, like physical real estate and private equit,y into cash when you need it, especially if you have 5-7% tied up to it.
• Emotional Attachments: Sure, there’s less emotional attachment when you start small on a particular investment. But, once it becomes part of your winning portfolio and after you’ve doubled down on it, it can be difficult to let it go once the asset class starts to go south.
• Market Timing: Being an expert on a specific investment has a few perks, but let’s face it: crystal balls down work. You can be confident about where the investment would go, but never 100% sure. 

Now, I’d say that most of these issues can be mitigated by careful investment management, due diligence, your experience in the asset class, and starting small. However, there’s really no telling what happens when your money is out there. So, it’s always best to approach a situation on its own merits. 

Final Thoughts on Portfolio Optimization Using the “Fewer and Deeper” Strategy

The “Fewer and Deeper” strategy isn’t just about reducing the number of investments—it’s about making each one count. Focusing on quality over quantity gives you deeper insights, better returns, and a more manageable portfolio.

What investing “rules” have served you well, and which ones do you think you need to evolve to get you to the next level?