You have repeatedly read the thesis - "don't put all your eggs in one basket."
We also mentioned about competent diversification on our channel. First of all, it helps to manage risks. You can read more about the value of diversification across asset classes in this post.
🤔 Have you ever thought that diversification can be excessive?
Here are common mistakes and their consequences:
📌 People perceive ETFs as separate, unique stocks. And they can choose dozens of different instruments for their portfolio. But it is always worth considering the assets that are inside the fund (their class, geography, capitalization category, etc.). For example, an investor can buy different funds that track the same index - large-cap US stocks. Thus, the portfolio only seems diversified, but in fact it is not. It is good to avoid duplication, to check for "overlap" of your own portfolio, you can use this service.
📌 Excessive diversification creates several problems and complications. A portfolio with a large number of assets is more difficult to manage. And you should also not forget about transaction fees and taxes.
📌 If you have too many assets, you increase the chances of getting below-average returns. In addition, the factors mentioned in the second paragraph will affect the result.
From experience, novice investors tend to over-diversify for the following reasons:
➡️ incorrectly defined risk profile;
➡️ misunderstanding of duplication and the very purpose of diversification;
This generates more emotional and impulsive actions.
➡️ and the third reason - excitement and "collecting" assets is a wrong approach to investments and requires adjustment.
At Smart Family Office, we have the opportunity to receive a consultation where an expert can provide a second opinion on your existing portfolio and help you put the benefits of diversification into practice.
🤝🏼 If you are interested in a consultation, write "+" chat with our manager @SFO_manager . He will guide you through the next steps.