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Is it possible to overdiversify?

by | Jan 22, 2012 | OTHER, SELF-PUBLISHED

Q – I have 16 different mutual funds in my portfolio of $600,000. I am a novice investor, and feel much better to have my assets diversified. Is there such a thing as being too diversified? – Glen B., Peterborough, Ontario

A – A properly diversified portfolio will maximize profits and minimize risk. When you purchase a mutual fund, you are buying a piece of a fund that invests in specific assets, including Treasury bills, GICs, stocks, and bonds in variety of sectors and countries. Funds are generally defined by the type of assets held. The most common funds include Money Market Funds, Fixed Income Funds, Balanced Funds, and Growth Funds. For more information on the various fund categories, see the Canadian Investment Funds Standards Committee website.

As a risk reduction tool, diversification makes sense. If you are over-diversified, however, you have stretched your investment strategy too thin, and you may be doing more harm than good. Your costs may increase and your holdings may be working at cross-purposes. For example, you do not need to hold three Money Market funds or four Canadian Dividend Income funds.

As an individual investor, you might find it difficult to track 16 different mutual funds and assess their suitability at different points in your desired time horizon. My suggestion is to review your investment objectives and risk tolerance to determine an appropriate asset allocation – in other words, first decide how much you want to commit to the broad categories of safety, income, and growth. Once you’ve completed this step, you can begin to select the funds that meet your desired outcome. The Fund Library has some powerful filters and screening tools to help you get started. Limit your fund holdings to between six and 10 funds.

Contact a qualified advisor to assist you if you are not clear about the range of options available to you. – R.T.

© 2021 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice.

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