Over Diversification

Over Diversification means “Problem of Plenty”. The Portfolios of many people suffer from the problem of Over Diversification.

One day I asked one of my friend that, How many stocks he own in his portfolio? He replied 250.

Well, 8-12 Stocks are enough in anyone’s portfolio to achieve the perfect diversification. In fact, I have seen several people who have more than 100 mutual funds in their portfolios. I don’t understand that what is the Logic behind owning 100 mutual funds? These people say that we are diversifying the risk.

Now one mutual fund contains anywhere between 30-100 Stocks Portfolio. So 2 or 3 Mutual funds are enough to achieve the optimal diversification. Now 100 mutual funds in your portfolio means “Every Stock in the market in your portfolio.”

Many people start collecting more and more stocks and mutual funds in the name of diversification. But in fact, this is not the diversification but it is the over diversification. And these people are not Investors but they are Collectors. And their Collection is not at all an ideal portfolio.

A perfectly diversified portfolio is one which contains 8-12 Stocks & 2-3 Mutual Funds. That’s it. Anything more than this is known as an Over Diversification.

Over Diversification is a disease. Unfortunately 999 out of 1000 people build an over diversified portfolio. People have a bad habit to add more and more stocks and mutual funds in their portfolios at the name of diversification. They think that, what they are doing is the Diversification but it is not the diversification.