The Dangers Of Over-Diversifying Portfolio
You invest your money but never heard about diversification, that's unlikely to happen. You know why you should not put your all eggs in one basket. You start investing in different assets. It seems you are doing a good job. But the thing is, over-diversification is not good. Let's talk about why you should not over-diversify your portfolio.
You throw your money into different assets without considering how it will affect your overall portfolio. You make a poor choice of investment. There are too many assets in your portfolio. By the way, did you get those assets for free? You invested your hard-earned money to get those assets. So you have to do your analysis properly before investing.
You find it difficult to keep track of everything. You have to look into different things to see how your assets are going, what information comes out in the market, what's the present situation of the company and so on. It is indeed complicated.
You will be confused about what to do. What applies to one kind of asset, you have to think differently for another kind of asset. You are switching from one section to another and making different decisions simultaneously. Do you think you can make good decisions when you are confused?
Having different assets in your portfolio does not mean it will reduce the risk. Having an over-diversifying portfolio gives a false sense of confidence. When you realize that, it's already too late and you lose your money. You have to analyze what's the relationship between those assets. If there is a negative correlation among those assets, you reduce the risk. In case you lose money in some investments, you will make money from other investments.
Over-diversifying portfolio not only increases the risk but also reduces the return on investments. You should consider quality over quantity. Putting your money into winning assets gives you a higher return. Diversify your portfolio, but don't fall into the trap of over-diversification.
So what do you think? Please feel free to leave your comments. Thank you for reading this post. That's it for now. I'll be back with another post.
Image Sources: 1
