- Where does the need to diversify stem from?
- How can diversification go awry?
- What is smart investment portfolio management?
Although a diverse portfolio is the basis for smart investment portfolio management, your portfolio runs the risk of growing too diverse. In 1989 Peter Lynch already recognised the problem of ‘diworsification’ in his book ‘One Up on Wall Street’, explaining how diversification can turn sour. But how do I diversify my portfolio without going too far?
Where does the need to diversify stem from?
Portfolio diversification has long since been a tried-and-tested method of reducing investment risks. Risky investments are balanced out by safer alternatives which operate completely independent in the market. If one suddenly plummets, the other will suffer no effects. But many financial advisors take the method too far in attempts to keep clients around by reducing the risks time and again until they end up with mediocre portfolios, defeating the purpose of diversification.
They do so with the best of intentions and to avoid nasty surprises, but it has a contrary effect and usually ends up requiring far more due diligence than the investments are worth.