Oftentimes, investors have a lot of things to consider, but some investment decisions matter more than asset allocation. A well diversified portfolio is important for young investors as well as for retirees. You may want to have a diversified portfolio so you can have your money resting in various types of assets. This is because if one investment declines, it won’t significantly affect others. So, if you got an investment that extends across a wide range of various types of assets, then you lessen the risk to your portfolio in whole.
Sadly, there are some investors who don’t know anything more about diversification. As the quotation says, don’t put all your eggs in one basket. Allotting time to fully decipher the ways and practices you might be executing yourself could earnestly improve your portfolio returns and deter shattering risk.
A well-known belief that exists is that younger persons should invest more in stocks and older beings should buy more bonds. Other people like to follow the “100 minus your age” rule to identify asset allocation. Begin with the number 100 and subtract your age. The difference is the certain percentage you should invest in stocks, and the rest should be allocated in bonds.
The simple rules or methods of thinking and deciding one’s asset allocation should build a long term growth for the investor, while giving fixed income stability. While it’s not a bad situation to start for the novice, there are a lot more things to consider when forming a completely diversified portfolio. Below are some investors’s mistakes they commit to diversification.
- Handling too many stocks which costs can destroy you
The more stocks an investor handles or owns, the more they likely to experience higher transaction fees as the relative size of their orders are condensed in relation to the fixed costs of trading. These higher transaction prices significantly lessen long term returns, especially in smaller portfolio sizes.
- Handling too few stocks which lead you to lose
Owning a few stocks may reduce your portfolio volatility, but the real risk is it significantly underperforms the market by missing the winners. According to a renowned financial theorist that you could only lessen the risk of underperformance by owning the entire market. Intuitively, by owning too many stocks, there will come a time when the impact of looking for a winner has a negligible effect on your portfolio, which rather destroys the joy of it.
- Mistakenly diversified portfolio
In the portfolio theory, it has shown that there is an ideal level of diversification between 2 stocks which both minimizes risk and maximizes return, ideally you want to own stocks that changes direction sharply to achieve this. But while this may be easy in theory, it seems to be way beyond the awareness of most investors. Higher portfolio volatility lays far greater emotional pressure on less urbane investors contributing to shoddy decision making and worse returns.