is usually there such a thing as being over diversified?
Diversify, diversify, diversify! of which’s the call of the modern investment adviser. The risk-management strategy allows you to protect yourself by huge losses by putting your investments into different asset classes, funds, geographies or stocks.
While one asset class may perform better than another in a given year, a diversified portfolio will deliver relatively consistent returns over time.
“Diversification may have hurt you This kind of year since emerging markets in addition to international markets haven’t done as well,” says Brian Face, of Face2Face Financial Planning. “however for the average investor, if you diversify correctly, diversification is usually going to be a smoother ride from the long run.”
Here are some ways to determine if you are getting what you want out of your diversification strategy.
Diversification can be cheaper
“If you are not diversifying you are not investing — you’re gambling,” says Roger Healy, principal of Hibernian Financial Planning.
“You can’t overdo This kind of,” he says. Any added investment to your portfolio is usually going to raise your diversification, he says, in addition to will ultimately lower your risk for the same return or increase your return for the same risk.
However, he says, the ‘over-diversification’ problem arises when you increase complexity without lowering your risk or increasing your return. This kind of will increase your cost, as well, from the form of extra fees.
Keep of which simple, he says, in addition to buy diversification wholesale, at a lower cost through mutual funds or ETFs.
“You probably need no more than 30 well-chosen stocks to have a diversified portfolio, however of which is usually cheaper to buy a basket containing all 500 S&P index stocks, so save time in addition to money in addition to buy the index,” Healy says.
Diversification is usually a strategy of which is usually put into place after your asset allocation, he adds. Buy a basket (or baskets) of securities from the proportions of which make sense for your level of risk tolerance.
Redundancies don’t diversify
Many estimate the point at which over-diversification occurs is usually when a portfolio has over 20 stocks, says Samuel Wieser, investment adviser at Northman Financial. however of which isn’t just about the raw number of investments you hold.
“Just buying a bunch of stocks, bonds, mutual funds, ETFs doesn’t necessarily mean you are diversifying,” he says. “You can hold a few different ETFs or mutual funds of which track the S&P 500 in addition to you won’t be any more diversified than just holding one of them.”
Since they all track the same index, they will all have very similar, if not identical, returns over time. Proper diversification entails buying a mix of securities of which differ in size, style, sector, in addition to region of the earth.
in addition to just because you have funds with multiple custodians (like TD Ameritrade, Vanguard, Fidelity in addition to Charles Schwab) does not mean you’re diversified. You may ultimately be invested in similar funds in addition to are just paying more in fees.
Check your work
The most common way to measure if holding two or more securities will provide your portfolio with diversification is usually to look at the correlation between their historical returns, says Weiser.
“One key mistake many make when looking at correlation is usually of which they use a static figure,” he says. “Two securities may go through periods in which they are highly correlated in addition to others in which they are relatively uncorrelated. So if you just look at the correlation over the past 12 months or past 36 months, of which can be misleading. A better approach is usually to look at the rolling correlation over a long period of time.”
Alternatively, you can look at the returns of your various holdings over time, says Weiser. “Many will likely grow together or decline together, however you are likely only over-diversified if they are growing in addition to declining at the same rate over the long term.”
Have an investing question? Ask us here to be included in a future column.
CNNMoney (fresh York) First published October 4, 2018: 1:58 PM ET