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How can I keep my investment portfolio management optimal without over-diversifying?

How can I keep my investment portfolio management optimal without over-diversifying?

  • Where does the need to diversify stem from? 
  • How can diversification go awry?
  • What is smart investment portfolio management?

Although a diverse portfolio is the basis for smart investment portfolio management, your portfolio runs the risk of growing too diverse. In 1989 Peter Lynch already recognised the problem of ‘diworsification’ in his book ‘One Up on Wall Street’, explaining how diversification can turn sour. But how do I diversify my portfolio without going too far?

Where does the need to diversify stem from? 

Portfolio diversification has long since been a tried-and-tested method of reducing investment risks. Risky investments are balanced out by safer alternatives which operate completely independent in the market. If one suddenly plummets, the other will suffer no effects. But many financial advisors take the method too far in attempts to keep clients around by reducing the risks time and again until they end up with mediocre portfolios, defeating the purpose of diversification.                                        

They do so with the best of intentions and to avoid nasty surprises, but it has a contrary effect and usually ends up requiring far more due diligence than the investments are worth.

How can diversification go awry?

Investment portfolio management is no easy feat, but certain signs can tip you off about being close to over-diversification. Firstly, mutual funds can often appear very different, but end up bringing the same advantages and disadvantages to the table as other assets. The same goes for diversifying within the same investment type, such as buying multiple individual stocks. They might appear different, but in the end they all act as stocks. Multi management often misleadingly suggests investments are safer than they really are.

Multiple managers bring multiple viewpoints to the table about which investments are a smart move in the existing market. That skewed picture can end up spreading your capital over more investments than you initially signed up for, with a lot of confusion and inflated due diligence as a result.

What is smart investment portfolio management?

In the end, knowing your preferences and exploring the market are the most important factors of smart investment portfolio management. Firstly, varying the nature of your investments is key. Although different types of stocks do exist, in the end they all behave as stocks. Choose several very different forms and assign about a third of your assets to them, with plenty to spare for other investments. Another third should go to fixed-income securities, which provide a stable buffer against fluctuations in other, more risky investments. The final third of your capital will do well with stable, more flexible options such as commodities.

Which commodities fit my portfolio? How can I be sure my portfolio fits my needs? Contact the experts at BAUNAT DIAMONDS for guidance in your asset allocation.

Author: Inge De Wee
Source: BAUNAT

With this article, BAUNAT strives to inform you thoroughly about investing in diamonds. No investment can be guaranteed to be without risk or fully according to your expectations. That is why we recommend to research the risks and aspects of investing in diamond properly to ensure that you make the right choice for your portfolio.

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