Quote:
Originally Posted by RickyTan3
Diversification is not always good.
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Quote:
Originally Posted by jasonturbo
I would love to hear the justification for this statement.
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I believe what RickyTan3 is trying to say is that one should not
over-diversify their portfolio because not all risks can be eliminated through diversification (ie market risk). Many investors think that risk is proportionately reduced with each additional stock in their portfolio but this is not the case. In reality you can only reduce your overall portfolio to a certain point/threshold at which there would be no further benefit from diversification.
For example you can purchase balanced funds which diversifies into over 100 stocks. Yes, your risk is reduced because balanced funds hold stocks in various industries but at the same time, since it is so overly diversified it hinders the growth potential.
There are also a very large risk differences between mutual funds and mutual funds that are sector specific but for arguments sake I'm assuming everyone on here is talking about a balance mutual fund.
The right level of diversification will ultimately depend on your personal risk level. If you would like to know more info on this feel free to look up the term "efficient frontier".