Diversification is very important. Like what is known, it’s all about not putting all your eggs in one basket. However, you also have to remember that anything too much is bad. The same rule also applies to diversification.
Indeed, diversification lets you lessen the risks of losing a large amount of money. Since the capital spread out, you stand to gain on some sectors even if you lose in others.
Unfortunately, many investors become too enthusiastic in diversifying their funds, bringing them to the trap of overdiversification.
Forex Trading Video Tutorials are signs to look for, and we have listed them down. See if you’ve hit some of these signs and ask yourself if it’s time to review the way you’ve diversified your portfolio.
You have too many funds within a single investment style.
If you haven’t noticed yet, some Forex Market mutual funds are named differently from each other even if they’re very similar in terms of their investment holdings and overall strategy.
Check to see if you currently own some funds like these. If the answer is yes, you might have already overdiversified.
The bad thing about this is that owning multiple mutual funds within one style category increases your investment costs. It also adds up to the investment due diligence. More importantly, it reduces the level of diversification that you may achieve by holding multiple positions, effectively cancelling out any benefit that diversification might have brought to your portfolio.
You use too many multimanager funds.
Many investors use multimanager investment products like funds of funds to achieve diversification at the drop of the hat.
Suppose you were already at retirement age, you may be better off choosing to diversify among investment managers using a more personalized manner.
If you want to utilize multimanager investment products, you should take into consideration their benefits as well as their inadequate customization. You should also bear in mind that these funds require high costs and layers of due diligence.
You have too many individual stock positions.
When you have too many individual stock positions, you will be required stellar amounts of due diligence, aside from being stuck in a complicated tax situation. The performance will also simply follow a stock index, but with higher costs.
It is generally accepted idea that you only need 20 to 30 different companies to sufficiently diversify your stock portfolio, though there’s really no strict consensus on this figure.
Regardless of the number of company stocks in your portfolio, you only have to invest in companies across different industries. It is also very crucial to make your portfolio comply to your overall investment philosophy.
You have some privately held investments that are no different publicly traded ones.
Non-publicly traded invested are often packaged as very stable products, with diversification benefits when paired with publicly traded investments.
However, even if these alternative investments can indeed help with diversification, they also bring with them extreme risks rooting from the complex and irregular valuation methods used on them.