Is It Possible to Over-Diversify Your Investment Portfolio?

Diversification is like ice cream: it’s good, but only in reasonable quantities!

Many individual (and institutional) investors get caught in the trap of building such a well-diversified portfolio – in order to help themselves sleep better at night or to please their clients – that they spread things out so much to the point where it can hurt them rather than help them.

Not only is it impossible to diversify away every possible aspect of risk involved in investing, it can cost you on the back-end in fees, trading costs, and taxes.

According to Warren Buffett, “Wide diversification is only required when investors do not understand what they are doing.” In other words, if you go overboard and over-diversify, you might not lose much, but you won’t gain much either.

The bottom line is it’s easier, more efficient, and cheaper to maintain an appropriate balance in your portfolio by owning 10 or less different asset classes rather than over-diversifying.

In the end, if you’ve got more than 10, you’ve gotta ask yourself: “Do I really need this many asset classes in my portfolio?” Most people’s answer is “No” since there ends up being quite a bit of overlapping taking place. So diversify, but don’t over-diversify!

The key is to find a happy medium between risk and reward that ensures that you’re able to achieve your financial goals without having to lose sleep.

By no means is this meant to be a replacement for good ole’ fashioned education, because procrastination and laziness can be very expensive.

If you’re the type of person who has a habit of cutting corners or trying to take short cuts, it’s going to end up costing you more time and money.

So the best advice I can give you is “invest” a bit of time and money in reading books on every aspect of investing and money management. It sounds cliché, but it’ll honestly be the best investment of time and money you’ll ever make.

Investing works best when you keep it simple. People like to complicate everything related to investing, and in turn, make it harder than it really is.

Successful investing is like gardening, not winning the lottery. You’ve got to plant lots of seeds ’cause the birds are going to get some of them.

Some will grow and others will wither away, and there will always be some routine weeding to do (and the occasional pests to deal with).

But as long as you manage things properly (and keep your “greed monster” in check), your investments will have the best chance of continuing to grow.

Water them and tend to them. You can nudge them a little, but rapid growth is usually shaky and weak, and can collapse on you. After a while, you’ll have several growing “money trees” that will eventually reach a level where they take off and are generating a healthy passive income for you.

Wealth is achieved through a combination of how hard you work, how much you earn, and how much your money earns, including how long it compounds.

Regardless of your long term goals, creating a consistent passive income isn’t always easy, but as long as you know what you want, have a plan and stick to it, there’s nothing that can stop you from achieving your financial goals.

If you’re already enjoying life at the higher stages, congratulations! I’ve found that the fun is in the journey, not the end result.

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