What is excessive diversification?
excessive diversification occurs when the investor puts his money into too many investments. It could be too many investments of the same type or too much as in the amount of investments that are in the portfolio. Portfolio diversification spreads the percentage of money so that part of the portfolio contains stocks, bonds, mutual funds, deposit certificates and other suitable investments. Diversification creates the right balance in the portfolio to reduce the risk, while excessive diversification balances balance and increases the risk.
According to financial experts, it contains a properly diversified portfolio of 15 to 30 different types of investment. Excessive diversification occurs when the investment portfolio contains more than 30 different types of investment vehicles. While experts emphasize the importance of diversification investments, most agree that diversification no longer provides the advantage of less risk. By distributing investment too many different investment vehicles adds a layer of risk because not all productsSufficient research and attention can be paid to. Every subtle investor knows that the investment should be explored and watched its success or failure.
There are indications that indicate when the portfolio is not properly diversified, except that the portfolio contains more than 30 different types of investment. The first feature is when mutual funds in the portfolio contain many same investments. Mutual funds are a combination of shares, bonds and other investments, so if mutual funds in the portfolio are exceeded, too much diversification is present.
Excessive diversification may also occur with different types of investment accounts. For example, if an investor has similar or the same investment in his personal investment portfolio And all his pension savings accounts, then his investment is not sufficiently diversified to minimize risk and maximize return inves.
Another feature of excessive diversification is when the portfolio has many privately traded investments. Although it is okay to own some privately traded stocks, there should be a balance between private and publicly traded shares in the portfolio. In addition, this is also in the portfolio for other types of investment.
Excessive diversification may be a problem rather than helping the investor and investment portfolio. The primary problem with excessive diversification is that it can give the investor a false sense of safety, which exposes him to the risk of great loss. While the right diversification does not exclude the risk, excessive diversification will give a portfolio to a greater risk of loss, or rather, prevents the investor to concentrate on building a properly diversified portfolio, which is higher by the bone to be profitable.