Many investors swear by diversification, and it is a way to help eliminate some risks in your portfolio. But what does that mean for people who want to heavily weight their portfolio with sin stocks? Does that mean you need to reduce the amount of sin stocks in your portfolio?
It might not. It’s impossible to diversify so much that you totally reduce risk. And, it’s possible to diversify too much so that you can’t invest substantially in some stocks because you’re too spread out and you erode your portfolio with fees while you constantly rebalance.
But somewhere in there is a happy balance — between being adequately diversified and still concentrated enough in categories, sectors, and industries that you believe offer the greatest opportunity. Think of it as “focused diversification” or “intentionally limited diversification”.
So for those of us who want a heavier weighting of sin stocks while still enjoying the benefits of diversification, here are 5 ways to diversify while still weighting your portfolio with sin stocks:
1. Invest in sin stocks and non-sin stocks
This is the most obvious one, which is why I mentioned it first. Diversify with a sin-stock/non-sin-stock split in capital — devoting a portion of your money to sin stocks and another portion to non-sin-stocks. (You’ll have to decide the amount, though; however, the more you believe in the sin stocks category, the more of your investible capital you’ll likely put into sin stocks).
2. Invest across the sin stocks board
Invest across the spectrum of sin stocks by investing in all of the categories I talk about here — alcohol sin stocks, tobacco sin stocks, gambling sin stocks, crime sin stocks, conflict sin stocks, sex sin stocks. By investing across these key sin stock categories, you diversify out of just one type of sin stock and thus avoid risks of (for example) a massive tobacco blight or prohibition 2.0. Of course, the amount of money you put into each of these categories should be weighted according to your due diligence findings of the opportunity that each one presents.
3. Invest deeply in each sin stock category
It can be tempting to choose just one sin stock in each of the categories and invest in it. And that gives you category-level diversification but still opens you up to other risks (like business risk of the particular company you are invested in, for example). One way to avoid this is to invest in several companies in each sin stock category. If you’re not sure what those companies are, check out my almost-definitive list of sin stocks. Again, the amounts you invest in these companies should be weighted according to your due diligence findings.
4. Invest across borders
Many investors simply invest in companies that they are familiar with and that trade on exchanges that they can easily access. But is that always the best option? By expanding your mindset globally, you might find other stocks worth investing in that aren’t sold here at home. Again, check my big list of sin stocks to see what exchanges these companies trade on. (And don’t just go with the exchange only. Remember that every company sells into different marketplaces and that is another type of cross-border diversification. So if you want global exposure of a cigarette brand, you may choose Philip Morris International (PM) instead of Altria (MO).
5. Invest in the future of sin stocks
When you invest in today’s sin stock categories, you are putting your more where you believe today’s and tomorrow’s opportunities are. But social values change and today’s sin stocks might not be tomorrow’s sin stocks. Rather, you might discover in your extended due diligence that there are future sin stocks that you never considered. You can diversify by investing in current sin stocks and in the companies you believe may become sin stocks in the near or distant future.