Why an Over-Diversified Portfolio Is a Problem
Life is filled with risks. Some risks are controllable, others are not. It’s no different with investing. Some investing risks are out of your hands completely, while others may at least be minimized by using certain strategies, like diversification.
You’ve probably heard that diversification of your investments is a good thing. And it seems to make sense: don’t put all your eggs in a single basket, spread your wealth across different asset classes and geographies, and you may be able to avoid the catastrophic risk that often comes with just a single investment or two.
And yes, that can be a good thing. But it’s also possible to have too much of a good thing – or to believe that you’re fully diversified when in reality you’re not.
A lot of investment gurus out there will tell you that having a large number of investments in your portfolio is always the best way to go, and that the more investments you have, the more diversified you are. But that way of thinking can create a false sense of confidence: you think you’re well diversified when in fact, many of your investments actually share a common risk.
What you may not know is that the actual number of investments a portfolio has says nothing about its risk-return profile. You could have a portfolio with 300 holdings that’s less diversified than a portfolio with just 10 or 15 holdings. It might seem counterintuitive, but, in some cases, by owning a little bit of everything, you may in fact wind up owning nothing. In other words, all you’ve got is just a large, inefficient index fund that’s loaded with overlapping, unnecessary investments.
Over the decades, we’ve seen a lot of fads, bubbles, and weird investing trends. And if you’re a long-time investor, there’s a decent chance that your portfolio contains elements of all of those. Kind of like the junk drawer you probably have in your house! You might have pieces of an outdated asset allocation, or a mutual fund left over from way back in the dot-com era, or some shares of a company that you’ve been holding onto just because you never thought about getting rid of it.
Is there anything wrong with owning all of that? Not necessarily – but you need to know what you own and why you own it.
Having a comprehensive investment strategy may give you the context you need to decide whether the investments in your portfolio are aligned with your goals. It’s a good idea to take what might be a jumbled mess of overlapping and redundant holdings and simplify it all into something that’s perhaps more efficient, more manageable, and more understandable.
And right now may be a very good time to do that. Our advisors at Lucia Capital Group can take a look at what you’ve got, see what may be still worth owning, help you decide if what you have is aligned with your goals, and reorganize.
We do portfolio reviews every single day with our clients, and if you need some help or guidance to determine what fits your current retirement goals, just give us a call; we’re here to help.
Different types of investments and/or investment strategies involve varying levels of risk, and there can be no assurance that any specific investment or investment strategy will be profitable for a client's or prospective client's portfolio, thus, investments may result in a loss of principal.
Diversification strategies do not ensure a profit and cannot protect against losses in a declining market.
You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.
Joe P. Lucia is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.