What happens when an investor tries to diversify too much? They end up with a portfolio that is too complicated and too hard to manage.
The article "Diversify or Di-worse-ify: The Fine Line Between Smart Strategy and Risky Overload" from Moneyweb discusses the concept of diversification in investment portfolios. It explores how diversification, traditionally seen as a risk management strategy, can sometimes lead to over-diversification or "di-worse-ification," where the benefits of spreading investments are outweighed by the complexities and costs involved. The piece highlights that while diversification can reduce risk by not putting all one's eggs in one basket, too much diversification might dilute potential returns, increase transaction costs, and make portfolio management cumbersome. It suggests that investors need to find a balance, ensuring that their diversification strategy aligns with their investment goals, risk tolerance, and the need for simplicity in managing their investments. The article also touches on the psychological comfort diversification provides, but warns against the false sense of security it might engender if not managed properly.
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