The trade-off for concentration is twofold: Concentrated portfolios tend to be more volatile than the broader stock market. This means they move around more, both up and down. Good days for the market can be great days for the portfolio. Bad days for the market can be terrible days for the portfolio. Concentrated portfolios don’t track the market. This is known as tracking error. It means concentrated portfolios can go down when the market goes up and up when the market goes down. The second kind of tracking error—portfolio up, market down—is the good kind. But you won’t notice.
