Diversification is a must for all kinds of investors. In fact, if you are a newcomer in the world of investing and seek financial guidance, any advisor will recommend you to start shaping a diversified portfolio.
The goal is clear, the more diversified your portfolio is, the fewer risks you have. However, it’s important not to overdo it. If you were excessively diligent in asset allocation, then brace yourself for a possible failure. There is a special term ‘diworsification’ coined by financial analysts. The word is used to describe a situation, when diversification has a negative outcome and decreases risks below average.
The earlier you realise your portfolio is diworsified, the easier it will be to fix it. Here are top four signs that say you should re-build your investment strategy.
You’ve Invested in Non-Traded Assets
Non-publicly traded assets are assets with a stable income. This grouping includes real estate, hedge funds, private equities, etc. These securities are often overestimated, and the risk they pose is overlooked due to the mistake in volatility calculations.
The thing is, the value of ‘alternative investments’ is determined based on estimates, while daily market data is not considered. Consequently, you are not able to understand their actual performance and the risk/reward ratio.
Don’t judge based on stable income. Non-publicly traded assets are not necessarily a safe heaven. Be careful while buying into them. Otherwise, it can lead to over-diversification.
You Put Down Money to Similar Mutual Funds
Investment choices abound. There are so many of them that it can confuse you. Each mutual fund assures you it is unique. The diversification theory cries out “Diversify!” So, what move will be smart?
While it may be difficult to pick up the right option, make sure you don't chase after all the opportunities you see. Think carefully. Two absolutely different mutual funds may have an identical strategy and one type of investment. Holding the same assets is costly and inefficient.