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Over Diversification Trap: How to save your portfolio from this trap?

Do you know that Over Diversification is a Trap? Do you know that right now your Investment portfolio might be suffering from the Over Diversification Trap? So What is Over Diversification Trap and how it affects your Financial Goals?

Well, In Simple words, Over Diversification means the problem of plenty. What many people do is, they buy more and more stocks & mutual funds at the name of diversification and keep adding them in their portfolios. So once a time comes when every stock or mutual fund in the market will be in their Investment Portfolios. Imagine that what will happen to your Portfolio if you add more and more stocks and mutual funds in it at the name of diversification? It will not remain a portfolio anymore but it will become a large collection of securities.

Over Diversification is a Trap because it will affect your long term financial goals. If you over diversify your portfolio than the impact of any one stock’s good return on the over all portfolio will be minimal and thus the return of your portfolio will become average. Say for Example, Imagine that your portfolio consists of 10 stocks so each stock’s over all influence on the portfolio will be 10%. So Gain in any one stock will have the impact on the over all return of the portfolio. But now imagine the portfolio having 100 stocks. So the return of any stock’s gain on the over all return of the Investment Portfolio will be just 1%. Not only this but some people collect hundreds of mutual funds in their portfolios at the name of Diversification. Now one mutual fund has a portfolio of anywhere between 30-100 stocks. So 100 mutual funds in a single Investment Portfolio means every stock in the market is in your portfolio. If your Portfolio is suffering from Over Diversification Trap than it means that you are going nowhere Financially.

So now review your portfolio and ask your self that weather your Investment Portfolio is suffering from this trap or not? If yes than don’t worry. You are not alone on this world. There are literally millions of people in this world whose portfolio is suffering from this trap. The main reason why people fall into this trap is lack of basic Financial Literacy.

So the solution of getting out of and stay away from the Over Diversification Trap is Financial Literacy. So now go and review your portfolio. Let me give you the unique tip. An Idea Investment portfolio should have either 8-10 stocks or 2-3 equity diversified mutual funds as a core, 1 Tax saving fund and 1 or 2 sector funds. Never Mix Direct Equity Investment with Mutual Funds. This tip will help you to get out of the Over Diversification Trap… Best Luck…!!!