Can you over diversify

In portfolio management this concept is totally false. Over diversification occurs when the number of investments in a portfolio exceeds the point where the marginal loss of expected return is greater than the marginal benefit of reduced risk. When adding individual investments to a portfolio, each additional investment lowers risk but also lowers the expected return. If you own just one stock your expected gain is very high but so is your risk.

Your entire portfolio performance would ride on that one stock. Each time an investment is added to the portfolio it lowers the risk of the portfolio, but by a smaller and smaller amount.

Maybe turn to the professionals. Jupiter Merlin Growth Jupiter runs a suite of funds under the Merlin label. Ninety One Global Income Opportunities This fund invests conservatively around the world in a diverse range of equities and bonds. This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy.

However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns.

Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. In this way, in case of a negative drawdown in the market, your risk of losses will be minimal. What is over-diversification, and why shouldn't you over-diversify your fund allocation? Tags: diversification, Kotak Mutual Fund,.

Your complete financial guide. Sometimes it rains, and when it does people want to buy umbrellas. While the rainy season means big business for the umbrella maker, it means hard times for the resort. Nobody wants to drink Mai Tais in a thunderstorm. The opposite is true with umbrellas, although periods of rain and sunshine can be very hard to predict on our island.

Same deal with a long rainy season. What should you do? Invest in umbrellas or resorts? Both, obviously. Diversification is an unalloyed good for investors, but it can be taken too far in certain cases. Here are a few of the risks of overdiversification:.

One of the most common issues that Elijah Kovar, a lead advisor at Minneapolis-based Great Waters Financial, sees when he meets with clients is owning too much of the same thing in different packages. When the stock market drops, so will your investments. While owning two mutual funds that do the same thing might be a problem for solo investors, robo-advisors help you steer clear of that headache. Robos instead invest your funds in ETFs across a dozen or more asset classes to achieve a diversified portfolio that matches your risk appetite.

The problem is that some will put you into funds that charge higher fees when you can get the same diversification with cheaper ETFs.

For instance, you can invest in all of the publicly traded stocks in the U. But many of the robo-advisors will slice and dice your asset allocation so you are invested in, say, iShares Dow Jones Select Dividend, which charges 0. This may effectively double your exposure to large, stable companies at a premium as both funds have heavy representation in that same industry. In addition, the difference in dividends between these two types of funds may not be worth the extra fees and difference in performance.

Of course, robo-advisors have their reasons for choosing one ETF over another, and sometimes their algorithms find that a fund with a higher expense ratio is worth the fee.

But you also need to keep in mind that most robo-advisors charge their own annual management fees in addition to ETF fees. Betterment and Wealthfront , for example, charge 0. While a robo will do all the work for you, a portfolio festooned with different funds may make you less likely to move to another investment firm or to learn how to do it on your own, even if such a move makes sense.

While robos can slice and dice a diversified portfolio too finely in some cases, they at least get the job of diversification done.