Tag: portfolio diversification

Some Disadvantages of Portfolio Diversification

Some Disadvantages of Portfolio Diversification

Making your portfolio diversified across a number of various investment categories, such as stocks, bonds, and cash equivalents, and within categories, such as stocks from different kinds of companies and a mix of corporate and government bonds can help decrease your risk. But there can be some disadvantages to diversification.

Indeed, diversification is universally recommended to lessen the risks of losing money, volatility and emotional stress. However, just as it can limit downside by reducing the possible risk and volatility across a group of investments, it can also limit your upside. It is actually possible for diversification to increase your risk if it leads you to buy investments that are too risky or that you don’t even understand very well.

A more-diversified portfolio can also be more time-consuming to handle than a less-diversified one, because you need to follow and trade in more investments, adding more layers of diversification just to make sure you are following to them. If maintaining your diversification requires you to micromanage and trade more frequently, transaction costs could be higher.

Below are some disadvantages of diversification that you might encounter eventually in your investment journey.

  1. Incomplete Return

Diversification can help you from striking out,  but it also keeps you from hitting a home run. For instance, if you invest your money in five various stocks, and one takes off, the other four stocks hold back your total return.

  1. Cost

Typically, you have the option of investing through a full-service broker, a discount broker or an online broker. Each category of broker has a unique commission format, and they all actually charge commissions or transaction fees. Placing all your money into a single investment normally can end up to a lower total fee than investing the similar amount of cash to a number various investments.

  1. Missed Fortune

You are neither to make a huge profit from a single sector nor to suffer a huge loss, if your portfolio is widely diversified. If 5 percent of your holding unexpectedly spike, you will make far lesser profit than if 100 percent of your holdings were in that place. It is very difficult to forecast or predict where and when this will occur to an asset class or market sector. The more firmly your investments are focused, the greater risk you are actually taking, and this can lead to bigger losses or to bigger gains.

  1. Wider Exposure

You could experience some amount loss whenever some part of your portfolio declines in value, if your holdings are widely diversified. If the overall market is decreasing, it is more likely that your holdings will perform the same thing. When you diversify your investments, you safeguard yourself from extreme financial exposure, but at the cost of missing out on probable major profits.

  1. No remedy

If you invest in a number of different stocks that all end up to be problems, your portfolio will still lose money, even if it is diversified. That’s it, diversification neither guarantees a profit, nor completely secure you against a loss.

Investors’ Common Diversification Mistakes

Investors’ Common Diversification Mistakes

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.

  1. 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.

  1. 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.

  1. 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.

Know the Ways to Diversify Your Portfolio

startup-diversification 600X400

It is often usual to hear investment advisors telling clients to keep a diversified portfolio. A diversified portfolio (also known as portfolio diversification) is investing in different classes of assets and securities (i.e. stocks, bonds, commodities, etc.) as a way of avoiding damage or risk due to poor performance of a single security, industry, and the others.

 

Portfolio diversification is an established strategy that is developed to moderate potential losses in the market. It is indeed a battle cry for a number of financial advisors and individual investors. Learn in this article why a diversified portfolio is important in any market condition and how to diversify yours.

 

  1. Distribute and scatter your wealth.

 

This just simply means that it is not advisable to put all your investment in one sector or in a single stock. Invest in several companies that you know is worth investing your money.

 

  1. Consider bond index funds.

 

Bond index funds are the most basic and economical way to invest in bonds. It is a kind of fund that invests in a portfolio of bonds. An average investor can easily understand how bond index funds work. It is the most convenient option for those going after investment income.

 

Instead of actively managing your funds, this one simply holds the securities intact together and when the index’ composition changes, the holdings in the fund follows. Investing in bond index funds is a great way to diversify your portfolio in a long-term span. In addition, bond index funds are fixed-income solutions to guard your portfolio counter to market volatility and uncertainty.

 

  1. Keep on investing and building your portfolio.

 

Make it a habit to regularly add to your investments. Market volatility is best fought when you invest your money in a diverse portfolio of stocks or funds.

However, adding and adding companies on your portfolio does not guarantee you profits. You have to carefully choose your stocks. Learn the strengths and weaknesses of a stock before you pick it.

 

Allot enough time to make your research and focus your money and time on stocks that you think can boost your wealth.

 

 

  1. Be sure to manage your wide range of assets well.

 

Having a big and diverse portfolio is not the bottom line. It is generally alright to keep a wide range of assets and to invest in a large number of securities, but you got to be sure that you can keep on managing each well. Stay current with your investments. Moreover, remain in tune with the market condition. You have to know what is happening to the companies you have invested your money in.

 

The IBD Chairman and Founder, William O’Neil, even expressed that “the more stocks you own, the harder it is to keep track of all of them.” He further added that, “broad diversification is plainly and simply often a hedge for ignorance.”

 

Conclusion

Investing should be a fun endeavor. It is important to maintain a disciplined approach when you are trying to diversify your portfolio. As the old adage goes, “don’t put all your eggs in one basket.” Maintaining a diverse portfolio is essential to regulate the risks. A good asset mix is vital to earning solid and stable returns.

 

BWorld is here to help you reach your goal of becoming expert in the field of investing. We can help you learn, practice and master the art of investing. For further questions regarding online trading, commodities, stocks, technology, and economy – feel free to reach us here. We hope you will continue your trading journey with us. Let’s get started!