Viewpoints

Viewpoints are the firm’s market and investment strategy commentary. 

Diversification vs. Overconfidence

A decision to take on portfolio concentration requires investors to be both skilled in forecasting returns and  in appraising their ability to forecast. If not, they will likely take more risk than they should. 

Research and experience teach that investors tend to underestimate risks and overestimate their forecasting skill. Before deciding to deviate from their strategic allocation, investors should examine their own biases and consider whether they are succumbing to overconfidence or confirmation bias. If they do decide to take an active position, its size should be appropriate to the magnitude of potential outperformance, the downside if wrong, the investor’s confidence in the forecasts, and an acknowledgement of the myriad risks that are lurking over the horizon.