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Hi! Do you think there is over-diversification?

Most people preach about diversification by investing into mutual funds, STI etc. Do you think there is a point of over-diversification?

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Discussion (8)

Kelly Trinh

21 Nov 2019

Backoffice technical at financial services firm

Need to consider what you mean by over diversification - diversification of an investment portfolio aims to remove so-called nonsystemic volatility through holding many (hopefully uncorrelated) assets.

STI has 30 constituents (and is considered quite a narrow index), S&P500 has 500 (companies - holdings are slightly higher due to dual class shares) and some world stock ETFs have thousands of underlying holdings. A breadth of exposures is generally considered desirable for a long term investor.

However, if you are directly holding many different instruments (eg 30 different holdings, whether direct shares or managed funds or ETFs) then you start to lose track of entry time/price and less clear about overall strategy/asset allocation. That is obviously not desirable but that doesn't take away from underlying benefits of diversification.

Paridhi Jhunjhunwala

19 Nov 2019

Associate at Kristal.AI


Yes, there is a chance that over-diversification takes place. Diversification refers to the process of investing in different asset classes to reduce the risk of the portfolio. This is because different asset classes (equity, debt etc.) show varying returns in the same situation. Thus, negatively correlated assets provide diversification benefits as the negative returns from one asset can be compensated by the positive returns in another category.
However, once the unsystematic or diversifiable risk has been eradicated, there is no benefit derived from adding more aseets into the portfolio. Now, the portfolio will be over-diversified.

I work at kristal.AI, and it's my passion to evaluate various upcoming investment opportunities.

Hope you find this helful.

Pang Zhe Liang

18 Nov 2019

Fee-Based Financial Advisory Manager at Financial Alliance Pte Ltd (IFA Firm)

Yes, over diversification is real. While we add and balance different asset class in an attempt to d...

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