Is More Diversification Always the Answer to a Good Investment Portfolio?
We know that diversification and regular portfolio rebalancing are keys to a solid investment portfolio. But is diversification always the answer? Interestingly, no. If you do not have a great deal to invest right now, diversifying may not be the best choice (unless you are getting that diversity by investing in a single index fund, perhaps).
Stock Trading to Go offers a handy guide to how much diversity you should consider for your investment portfolio, depending on how much money you have to invest:
Depending on how much money an investor has set aside to invest in the stock market, their portfolio as far as number of holdings should follow this general diagram:
- <$4,000 = 1 stock
- $4,000 - $10,000 = 1 - 3 stocks
- $10,000 - $20,000 = 1 - 5 stocks
- $20,000 - $500,000 = up to 6 or 7 stocks
- >$500,000 = 10 - 15 depending
I like this because it points out the possibility of over-diluting your investment portfolio. Indeed, it is possible to have too much diversity, with your investment holdings so spread out that they are rather impotent. In some cases, it is a good idea to have concentrated returns from a few solid holdings. As you increase your net worth and have more money to invest, then you can consider diversifying further.
It is best, especially for beginners, to try and keep things as simple as possible. Don’t get caught up in constant re-allocation and diversification. Instead, research some solid investments and add those to your holdings.
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. You are responsible for your own investment decisions and any loss that may result from your decisions.
Tags: stock market, investment portfolio, investing blog, diversification,
holdings, investments, index fund
