Do You Have Too Much Diversification?
It is true that one of the main rules of investing is to include diversification. Indeed, diversification can be a good way to protect your investment portfolio from devastation, and it can provide a way for you to create more solid returns overall. But, like so much in life, too much of a good thing can actually be bad. This applies to diversification as well.
Money Talks reports on what Bankrate says about having too much diversification:
Financial industry experts agree that over-diversification can actually thwart your investment goals in the long run, as too many securities or mutual funds can diminish portfolio performance, increase costs and create an overwhelming amount of work for advisers and investors.
The idea is moderation. You don’t want to diversify your investment portfolio to the point that everything is diluted and the administrative fees pile up.
Instead of focusing primarily on achieving diversification, you should consider asset allocation. Create a plan that allows you to determine what you need to do right now, and it has you look at your individual needs. This includes looking at your risk tolerance, and deciding what kind of risk your investment portfolio has — and what it can handle.
Choose a few diversified investments
Instead of choosing a lot of investments, hand-pick a few that offer you a reasonable amount of diversification. Many experts agree that 10 to 12 individual stocks are sufficient, and mixing it up with a couple mutual funds, ETFs and other investments is fine. There is no need to go crazy and “diversify” with 40 or 50 stocks.
In the end, the key is moderation and planning. Whether you make the plan yourself, or enlist the help of a professional, you need to look at your needs and find a direction for your investment portfolio.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss.
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investment portfolio, investments, mutual funds
