Asked by Anonymous

Is there such thing as overdiversification of portfolio?

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  • Sandra Teo
    Sandra Teo
    Top Contributor

    Top Contributor (Apr)

    Level 6. Master
    Answered on 14 Mar 2019

    Hi there! Yes, overdiversification is a common and serious mistake that investors make! Overdiversification happens when the marginal loss of expected return is greater than the marginal benefit of reduced risk. In other words, over-diversification reverts your portfolio performance to median or the average. For example, holding too many active equity funds can result in the investor owning most or all the companies in the index. This means they could be better off buying a cheaper passive fund (eg. ETF or an index fund).

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  • Zann Chua
    Zann Chua
    Level 6. Master
    Answered on 14 Mar 2019

    Hello! Yes there is such a thing as over diversification. It may not be good to over diversify. This occurs when the number of investments in a portfolio exceeds the point where the marginal loss of expected return is greater than the marginal benefit of reduced risk. Overdiversification may result in concentrating on the quantity of the investments rather than the quantity.

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  • Chris Chin
    Chris Chin
    Level 4. Prodigy
    Answered on 15 Mar 2019

    Yes, over diversification occurs when the number of investments in a portfolio exceeds the point where the marginal loss of expected return is greater than the marginal benefit of reduced risk.

    Read more details here and the solution to avoid it. http://www.arborinvestmentplanner.com/over-diversification/

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