Portfolio Diversification and Its Risks

You may have heard a thousand times that diversification is the key to create a balanced portfolio and to make successful investments in the long-term. No doubt this works in practice as well but the reasons for diversifying your investments do matter. If you understand your investments well enough, but choose to diversify simply to achieve more balanced returns, it could work well enough. However, if you think diversifying is a good idea simply because you do not understand your investments properly and are afraid of losing money by betting on some single stock, probably you will still lose.

Another risk in developing a diversified portfolio is that you may lose sight of the fact that you do not need to diversify beyond a certain limit. Over-diversification of an investment portfolio can make any meaningful returns too negligible, thus working to neutralize the very reason for making any investment in the first place. Most of the time, diversification is simply meant to cover against the high-risk investments by making equal or higher investments in low-risk options to minimize the losses. However, if you plan to gradually increase your returns then you need to revisit your investment choices regularly and optimize your portfolio by making any necessary changes.

Still, it is important that you recognize your long-termvalue investments and let them lie undisturbed till such time that they realize their potential. The motive behind portfolio management should be to improve your long-term returns and not hamper them. Investment is all about making the right moves and then let the market run its course while you just sit back and watch. Keep an eye on the fundamentals which made you choose a particular stock as a good investment in the long term and if the fundamentals still hold good, do not dispose it off just because of a bearish market outlook. If done the right way, portfolio management and optimization can be the key to become a good investor.