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Over diversification means Lower Returns

Over diversification means Lower Returns: How?

by Holistic Leave a Comment | Filed Under: Investments

Diversification of investment means selecting multiple asset classes or investing in the different asset categories. It is a popular technique employed by most investors to lower risk and increase the chances of good returns. Unfolding your investment in different areas develops a risk-proof portfolio, which means if one investment fails, another will balance it out.

How to design a diversification strategy? :

Having a diversified portfolio helps palliate risks. However, investors usually wonder the quantity of diversification rather than quality. Too less or excessive diversification may not provide the most coveted outcome. You have to design a balanced and wise diversification plan for better returns.

Why diversification is a must? :

Firstly, diversification lowers risk. Secondly, the returns of different asset classes differ in different phase of life. The investment in one asset class fetched negative returns this year, but other investments have performed exceptionally well in the market . This has balanced your loss/risk. For better understanding, stated below is an illustration:

Mr. X invested in gold and it has performed wonderfully until last year. However, in the current year it has brought in negative numbers. But his investment in stocks has worked in your favour and brought in superlative return.

The above example shows how Mr. X earned handsomely well, despite losing upon one asset. Therefore, diversification is needed.

How should investors diversify stocks? :

Diversification in shares or stocks can be easily achieved by purchasing stocks from different sectors. However, it is important to select sectors that are not related. This way a fall in one sector may not affect other sector much. For instance, an investment in Infrastructure stocks will not have a direct effect on your investment in Pharmacy stocks.

However, it is significant not to diversify too much because over diversification creates problem in managing and tracking your portfolio.

How investing in different asset categories helps investors? :

Investment in different asset classes like:

  • Bond – brings in assured income i.e. gives assurance of ‘fixed’ income.
  • Stock /equity fund– helps in successful growth of your investment portfolio.
  • Liquid investment – Bank FDs and liquid assets guarantee the liquidity.
  • Income funds – guarantees income stability.
  • What are the advantages of a diversified portfolio? :

    Diversified portfolio pronounces several benefits to the investors . Revealed below are a few:

  • It helps to multiply returns.
  • Money diversification means risk diversification. It helps to limit investment risks.
  • It helps in increasing liquidity rate in your portfolio.
  • At times, single investment results in higher risk and lower returns. Diversified portfolio generally assures desired results.
  • What are the Risks even after Portfolio Diversification? :

  • Diversified portfolio has certain built-in risks. For example, stocks could be fickle in the short term.
  • Even though you have carefully diversified your portfolio, there is always a percent chance of investors undergoing losses due to emergency conditions. Some of these factors include commodities meltdown, global financial crises, socio-political condition and others.
  • What are the dangers of over-diversification? :

  • Over-diversification creates problem in maintaining and managing investments. Too many stocks in a portfolio may not give a significant value to your investments. Also, it becomes difficult to keep track of various investments.
  • Another problem with over-diversification, it generally leads to increase in transaction costs like bank charges, fund manager fee, DP charges and so on.
  • Over diversification will dilute the returns. Instead of limiting your investments in a few best investment options, you will tend to diversify in more investment options. As a result you will be investing in best and average investment options also. This will dilute the return.
  • What are the perils of too less diversification? :

    If you do not diversify your portfolio, your risk of losing too much on assets will increase. Also, less diversification will lead to high risk.

    The main goal behind portfolio diversification is risk diversification, earn a decent return in a reasonable time frame with less volatility fulfill the planned financial objectives. In order to diversify your portfolio in a customized way, you must have a comprehensively created financial plan to achieve your aims.

    If you are really interested in creating a personalised financial plan, then I would suggest you to test-drive our services by opting for

     
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    Jey S
    24. September, 2021.
    I have been using Holistic Investment Planners for the last three years. Mr. Srinivasavaradhan answered all my questions and doubts very patiently during the first free consultation. I was able to clearly define my short-, medium- and long-term goals once I signed up for the comprehensive plan and got their investment plan suggestion to achieve my goals. They are very polite and highly professional whenever I contact them for any queries or make investments. They never pressurize you to invest on their recommended financial products. I would have been lost money by investing directly without their help since I do not have time and knowledge about different financial products. Risk planning is also done as part of financial planning. Truly, they are holistic planners when it comes to your financial planning. They help you to define your life goals, understand your financial resources and establish a plan to invest towards reaching those goals. They do review your plan as you progress to make sure that you are on correct path to achieve those goals. Kudos to the team and keep up the good work!!! I am happy that I found holistic investment planners for my financial planning and management.
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    aksaswadkar
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    Sridhar
    8. September, 2021.
    Financial planning brings peace in life. Holistic Investment have supported in arriving financial plan based on future goals. My investments are regular since then. They are professionals in their business, will recommend others.
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    Nitesh Agrawal
    6. September, 2021.
    I have been using Holistic Investment Planners from last one year. The journey has been fantastic. Being a finance person myself I always thought we can look after and plan own finances also. However, due to lack of time and deciplain the things are not always as desired. After joining with Holistic Investment for the first time Icame to know the Financial goals and quantified them. Some dreams were unrealistic based on the earnings and savings so had a reality check. Also got the information and deciplain of investing on regular and more rewarding securities. I definetly suggest to use Holistic Investment Planners. They are professionals, available and hear youor full story before presenting plans. They are flexile in the sense if there are some urgent deviations required, they help to plan the same. For all professionals/individuals I would suggest using professional help of Holistic Investment Planners for best results in long term investment and financial goals achivements. Last advise will be to start early in your life. It really pays well to start in the beginning itself else the dreams needs to adjust :)
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    Shivaram Andiappan Selvaraj
    Shivaram Andiappan Selvaraj
    3. July, 2021.
    I got a free first time consultation. I got my doubts resolved. They also gave additional advises for investment planning which was also useful.
    Nellai B
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    Google rating score: 4.4 of 5,
    based on 61 reviews

    Google Reviews

    Jey S
    Jey S
    24. September, 2021.
    I have been using Holistic Investment Planners for the last three years. Mr. Srinivasavaradhan answered all my questions and doubts very patiently during the first free consultation. I was able to clearly define my short-, medium- and long-term goals once I signed up for the comprehensive plan and got their investment plan suggestion to achieve my goals. They are very polite and highly professional whenever I contact them for any queries or make investments. They never pressurize you to invest on their recommended financial products. I would have been lost money by investing directly without their help since I do not have time and knowledge about different financial products. Risk planning is also done as part of financial planning. Truly, they are holistic planners when it comes to your financial planning. They help you to define your life goals, understand your financial resources and establish a plan to invest towards reaching those goals. They do review your plan as you progress to make sure that you are on correct path to achieve those goals. Kudos to the team and keep up the good work!!! I am happy that I found holistic investment planners for my financial planning and management.
    aksaswadkar
    aksaswadkar
    24. September, 2021.
    I was about to retire and really not understanding how to invest money to have financial freedom and fulfilling my goals. Was desperately searching on internet way out and fortunately came across Holistic Investment Planners. I read number of articles on their website and realized that this is the agency which I want and engaged their services for my retirement planning. It is an excellent experience to be associated with Holistic. Right from day one our interaction was fantastic and they gave me such a wonderful plan that I had never imagined. I am fortunate enough to be in the client list of Holistic. I have recommended Holistic to my friends as well.
    Lionel Faber
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    16. September, 2021.
    I've been availing their services for the past year. They are highly knowledgeable in the field and are very patient with all doubts and queries. Personalized financial planning is provided keeping your short term, medium term and long term goals in mind. They do not pressurize you to purchase schemes of their choice. They provide their input and suggestions and leave the decision up to you which shows their honesty and high principle.
    Sridhar
    Sridhar
    8. September, 2021.
    Financial planning brings peace in life. Holistic Investment have supported in arriving financial plan based on future goals. My investments are regular since then. They are professionals in their business, will recommend others.
    Nitesh Agrawal
    Nitesh Agrawal
    6. September, 2021.
    I have been using Holistic Investment Planners from last one year. The journey has been fantastic. Being a finance person myself I always thought we can look after and plan own finances also. However, due to lack of time and deciplain the things are not always as desired. After joining with Holistic Investment for the first time Icame to know the Financial goals and quantified them. Some dreams were unrealistic based on the earnings and savings so had a reality check. Also got the information and deciplain of investing on regular and more rewarding securities. I definetly suggest to use Holistic Investment Planners. They are professionals, available and hear youor full story before presenting plans. They are flexile in the sense if there are some urgent deviations required, they help to plan the same. For all professionals/individuals I would suggest using professional help of Holistic Investment Planners for best results in long term investment and financial goals achivements. Last advise will be to start early in your life. It really pays well to start in the beginning itself else the dreams needs to adjust :)
    Swetha Vasanth
    Swetha Vasanth
    6. September, 2021.
    This is my first year service with the Holistic Team and I would say that they are very much helpful in creating a financial plan and follow ups during the year. I would definitely suggest them if anyone who is willing to proceed with their savings professionally.
    Joseph Mathias
    Joseph Mathias
    6. September, 2021.
    I came to know about Holistic Investment Planners online while searching for different investment ideas. Once I contacted them the journey was very smooth. Mr. Ramalingam explained all the aspects of Financial planning in detail and it opened my mind. I realized how important it is to have a Financial planning. Mr. Rajan suggested all the requirements as per my goals and made a Investment plan keeping in mind of my goals. I started my Investment journey with them. I wish I had done it some years back then it would have been in a different level. Review meetings were held every six month to check the implementation of the plan and check the results as per the requirements and to check if any changes required. Overall it was a good experience with Holistic Investment team and would like to continue in the years to come.
    Srinvas Kannan
    Srinvas Kannan
    30. July, 2021.
    I came across Holistic investment planners almost 5-6 years back, but I did not have the trust since I had met a few of them who did not sound promising. Then I started investing through a financial advisor of my friend. After 4 years of investing the returns were very low. I was disappointed and started looking for financial advisors when I came across Holistic investment. I had a detailed discussion about my goals and the way they would approach achieving my goal before deciding to switch my investments to them. After a thorough analysis of my then existing portfolios, they suggested new ones and we zeroed-in on 6 schemes/funds where our investment would be split. I am glad I made the decision of switching over and taking Holistic planner's advise, my returns are handsome and I only wish I could have taken their help/advise 5 years back itself. Neverthless, I would like to recommend their services for investment and financial advise if someone is serious about their investments.
    Shivaram Andiappan Selvaraj
    Shivaram Andiappan Selvaraj
    3. July, 2021.
    I got a free first time consultation. I got my doubts resolved. They also gave additional advises for investment planning which was also useful.
    Nellai B
    Nellai B
    26. June, 2021.
    I have been associated with them for the past three years. They are very professional and polite in answering all our questions. I have complete trust in their suggestions. I strongly recommend for anyone. I am looking forward to have strong and successful association with them.
    Google rating score: 4.4 of 5,
    based on 61 reviews

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