Is There Such a Thing as “Too Diversified?”

Is There Such a Thing as “Too Diversified?”
A client brought up the concept of being too diversified recently, and it gave me pause. My initial reaction was that there is no such thing . Diversification is a good thing. It allows you to minimize  risks inherent in individual investments (company gets sued, senior executive leaves, “next big thing” flops, etc.) and take the risks you should be focusing on. As I’ve said before, diversification is the only free lunch in finance. But the client’s question wasn’t really about diversification – it was about whether we are taking the right risks. What Risks Don’t We Want to Take? This has got me thinking about some of the risks that we want to take, and the risks that we do not want to take. We’ve covered the risks that make sense in the context of our portfolios and we want to take, but we haven’t covered the types of risk that don’t make sense. We ask three questions when looking at a risk premium: Is this actually a risk factor? Does this work in the context of our portfolios? Can the risk premium be captured efficiently and effectively? We use these (mainly the first one) to focus in on […]

Source: Retirement Researchers

Is There Such a Thing as “Too Diversified?”

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