Diversifying your portfolio is probably one of the most important topics that advisors’ talk about. It helps reduce the risk to your investments by not putting all your eggs in one basket. This is sound advice but, can you inadvertently overdiversify your portfolio in an attempt to spread risk?
What is diworsification?
‘Diworsification’ (too much diversification) can lead to having too many stocks in your portfolio and end up costing you more in investment fees, confusing you, and even leading to below average returns.* The more you add funds to diversify and lower risk, the more chance you have of receiving lower expected returns.
Danger signs that you are overdiversifying
- Owning too many similar funds in the same category – you might have several funds in your portfolio that are invested in similar asset classes or categories e.g. equities or minerals and energy sector.
- Owning too many individual stocks – this could lead to complex tax and due diligence requirements.
- Owning too many funds of funds – these funds are already diversified and having too many will overdiversify your portfolio.
- Having a high number of funds in your portfolio – the average portfolio consists of around 30 funds, but the number does depend on your individual investment needs. If your portfolio is reaching triple digits for example, you could be paying a fortune in investment fees and earn lower than average returns.
Ask the experts
Always make sure you understand the funds in your portfolio, that your advisor explains what they consist of, and the reasons why to include them. Don’t get caught up with funds you don’t understand. They might be the latest investment ‘blue eyed boy,’ but not necessarily suitable for your portfolio and financial plan.
Your advisor is an expert on compiling your financial portfolio according to your risk and financial needs. They will advise on the correct balance of funds needed to diversify your portfolio.
Please note, the above is for education purposes only and does not constitute advice. You should always contact your deVere Group advisor for a personal consultation.
No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.