{"id":21871,"date":"2020-04-24T13:41:59","date_gmt":"2020-04-24T12:41:59","guid":{"rendered":"https:\/\/traders-paradise.com\/magazine\/?p=21871"},"modified":"2020-04-24T16:32:25","modified_gmt":"2020-04-24T15:32:25","slug":"the-danger-of-diversification-in-investing","status":"publish","type":"post","link":"https:\/\/traders-paradise.com\/magazine\/2020\/04\/the-danger-of-diversification-in-investing\/","title":{"rendered":"The Danger of Diversification In Investing"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_74 counter-hierarchy ez-toc-counter ez-toc-grey ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><a href=\"#\" class=\"ez-toc-pull-right ez-toc-btn ez-toc-btn-xs ez-toc-btn-default ez-toc-toggle\" aria-label=\"Toggle Table of Content\"><span class=\"ez-toc-js-icon-con\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #999;color:#999\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #999;color:#999\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/span><\/a><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/the-danger-of-diversification-in-investing\/#Diversification_has_to_be_a_well_thought_out_step_for_investors_It_can_boost_growth_and_lead_you_to_wealth_But_if_doing_improperly_it_can_cause_costly_failures\" >Diversification has to be a well thought out step for investors. It can boost growth and lead you to wealth. But if doing improperly, it can cause costly failures.<\/a><\/li><\/ul><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/the-danger-of-diversification-in-investing\/#The_danger_of_diversification_in_investing\" >The danger of diversification in investing<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/the-danger-of-diversification-in-investing\/#Portfolio_without_focus\" >Portfolio without focus<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/the-danger-of-diversification-in-investing\/#A_complicated_mixture_of_assets\" >A complicated mixture of assets<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/the-danger-of-diversification-in-investing\/#Portfolio_volatility\" >Portfolio volatility<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/the-danger-of-diversification-in-investing\/#Having_an_index_fund_instead_of_a_portfolio\" >Having an index fund instead of a portfolio<\/a><\/li><\/ul><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/the-danger-of-diversification-in-investing\/#What_can_put_us_in_danger_of_diversification\" >What can put us in danger of diversification?<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-8\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/the-danger-of-diversification-in-investing\/#Comfort_from_following_others\" >Comfort from following others<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-9\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/the-danger-of-diversification-in-investing\/#The_fake_feeling_of_security_can_bring_us_to_the_danger_of_diversification\" >The fake feeling of security can bring us to the danger of diversification<\/a><ul class='ez-toc-list-level-4' ><li class='ez-toc-heading-level-4'><a class=\"ez-toc-link ez-toc-heading-10\" href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/the-danger-of-diversification-in-investing\/#Bottom_line\" >Bottom line<\/a><\/li><\/ul><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h4><span class=\"ez-toc-section\" id=\"Diversification_has_to_be_a_well_thought_out_step_for_investors_It_can_boost_growth_and_lead_you_to_wealth_But_if_doing_improperly_it_can_cause_costly_failures\"><\/span><img loading=\"lazy\" decoding=\"async\" class=\"alignnone size-full wp-image-21872\" src=\"https:\/\/traders-paradise.com\/magazine\/wp-content\/uploads\/2020\/04\/the-danger-of-diversification-t1-1.jpg\" alt=\"The Danger of Diversification In Investing\" width=\"800\" height=\"533\" \/><br \/>\n<strong>Diversification has to be a well thought out step for investors. It can boost growth and lead you to wealth. But if doing improperly, it can cause costly failures.<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Investors infrequently pay attention to the danger of diversification. All taught that the idea of diversification is to <\/span><a href=\"https:\/\/traders-paradise.com\/\"><span style=\"font-weight: 400;\">reduce the portfolio&#8217;s risk<\/span><\/a><span style=\"font-weight: 400;\">. And nothing is wrong with that. Some amount of diversification is important or investors will take too much risk that will never be neutralized for.<br \/>\n<\/span><span style=\"font-weight: 400;\">But sometimes too much can be very bad. It is the same with the diversification of the portfolio if it is too diversified. And we will explain to you the danger of diversification.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">So, in the first place, the danger of diversification may come when the diversification is done improperly but also if the investment <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/beginner-investment-portfolio-how-should-it-look-like\/\"><span style=\"font-weight: 400;\">portfolio<\/span><\/a><span style=\"font-weight: 400;\"> is over-diversified. But let&#8217;s go step by step through all examples of the danger of diversification because they can be very costly. They can ruin the whole investment and leave you with your empty hands.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"The_danger_of_diversification_in_investing\"><\/span><b>The danger of diversification in investing<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<h3><span class=\"ez-toc-section\" id=\"Portfolio_without_focus\"><\/span><b><i>Portfolio without focus<\/i><\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">No one will tell you that the danger of diversification is the reduced quality of your investments. In investing, one of the very important parts is to have a well-focused portfolio. That provides investors to have the <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/04\/how-to-trade-options-and-make-the-best-returns\/\"><span style=\"font-weight: 400;\">best opportunities<\/span><\/a><span style=\"font-weight: 400;\">. To say this way, publicly listed companies are not all worthy to invest in. Also, what is maybe more important, you can find even fewer companies that are so-called safe investments. In order to have well-diversified portfolios, investors don&#8217;t pay enough attention when picking the stocks they could add many of them that don&#8217;t give a margin of safety to the portfolio. That will cause a reduction in the quality of investment. That would be the danger of diversification.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"A_complicated_mixture_of_assets\"><\/span><b><i>A complicated mixture of assets<\/i><\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">The other danger may appear if investors add too many assets without truly understanding what they have. In other words, their portfolios are too complicated. The point with investing is to have control over your investments and know what they are. If you have too many assets from different classes you would be lost in attempting to follow them and to stay on top of them.\u00a0<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Portfolio_volatility\"><\/span><b><i>Portfolio volatility<\/i><\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">It&#8217;s very important to understand that the more stocks you add to your portfolio, it will be more correlated to the market returns. There is some logic behind and you have to understand it because portfolio <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/03\/volatility-trading-how-to-trade-volatility-profitably\/\"><span style=\"font-weight: 400;\">volatility<\/span><\/a><span style=\"font-weight: 400;\"> can lower your portfolio performance. So, it can be too risky. Always keep in mind that the number of investors that ever reach average returns is under the average. The reason is the volatility caused by risk.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Having_an_index_fund_instead_of_a_portfolio\"><\/span><b><i>Having an index fund instead of a portfolio<\/i><\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Instead of buying too many stocks and adding too many assets, it&#8217;s better to buy some index funds. If you have too many assets, your portfolio will look like an index fund anyway. So indexing can be the danger of diversification. Indexing is good when the bull market, but if it is bear you could be faced with a lot of problems and danger.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Indexing, as well as over-diversification, represents the hidden danger of diversification. For example, if your portfolio may not have quality if you hold second-rate investments along with great investments. Sometimes, holding so-called inferior investments is the result of ef emotional buying, so avoid that. Pick stocks after you research them, never based on some emotions.<\/span><\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_can_put_us_in_danger_of_diversification\"><\/span><b>What can put us in danger of diversification?<\/b><span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The largest single danger is a surprise risk. Surprises are often part of our everyday life but when it comes to our investment it is a sign that we as investors are not cautious enough. Investors should be aware of risks and to predict them as much as possible. It is crucial in investing, due to safety, to quickly transfer our assets that show more risks than we expected or we can accept.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Also, forget you&#8217;re able to have an excellent and <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/03\/how-to-create-a-trading-plan\/\"><span style=\"font-weight: 400;\">perfect plan<\/span><\/a><span style=\"font-weight: 400;\"> for your future. Very often some unexpected events can arise. For example, this coronavirus pandemic that we have now. These events have a great impact on our investments so if we have over-diversified portfolios how could we manage all the investment? It&#8217;s almost impossible.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The perfect investment plan doesn&#8217;t exist. Every single investor made some mistakes. Just listen to what Warren Buffet has to say about his mistakes and wrong decisions. Yes, even him.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The belief that you are always right isn&#8217;t only a stupidity, it is a more dangerous practice. However, it demands to keep on learning in order to modify your behavior.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you never change your behavior you&#8217;ll take too many risks and you&#8217;ll put yourself in one of the dangerous situations. Moreover, you&#8217;ll never grow as an investor and, also, your capital will not grow. Sometimes it is better to give up and admit we are wrong than stay with the wrong plan and make more mistakes.\u00a0<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"Comfort_from_following_others\"><\/span><b>Comfort from following others<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">We are all vulnerable and insecure at some level, whether we admit it or not. A great number of people seek help in instant solutions. The easiest way is to follow what other investors do. That&#8217;s a kind of psychological effect. If the majority is doing something, how can that be wrong? Remember, only a few investors know how to make money on the stock market. The others, the majority fail. The stats are cruel.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The winners represent a small part of all investors.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Investing is difficult but it can be very successful and profitable. All you have to do is to guess where the new gain capacity will come from. The tricky part is that you cannot do that without the knowledge and without comprehensive research. The best suggestion is: follow the standards, not the people.<\/span><\/p>\n<h3><span class=\"ez-toc-section\" id=\"The_fake_feeling_of_security_can_bring_us_to_the_danger_of_diversification\"><\/span><b>The fake feeling of security can bring us to the danger of diversification<\/b><span class=\"ez-toc-section-end\"><\/span><\/h3>\n<p><span style=\"font-weight: 400;\">The truth is that many apparently diversified <\/span><a href=\"https:\/\/traders-paradise.com\/magazine\/2020\/01\/lazy-portfolio-make-wealth-with-minimum-engagement\/\"><span style=\"font-weight: 400;\">portfolios<\/span><\/a><span style=\"font-weight: 400;\"> aren&#8217;t really diverse. For example, if your portfolio consists of stocks of 5 different companies and 5 different industries it might seem as a well-diversified one. But if all your portfolio consists of 100% stock in one market index and they are all based in the same country and have exposure to the same currency, you have a very dangerous diversification. In other words, your investment is at great risk.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">You might think you made a great choice, but in reality, you are at risk to lose everything if some unfortunate event hit that country or currency.<\/span><\/p>\n<h4><span class=\"ez-toc-section\" id=\"Bottom_line\"><\/span><b>Bottom line<\/b><span class=\"ez-toc-section-end\"><\/span><\/h4>\n<p><span style=\"font-weight: 400;\">Proper diversification is a matter of great importance. Smart investors allocate their money based on their own valuations, never on some prophecy or doubted predictions. Avoid over-diversification if you are invested in ETFs or <\/span><a href=\"https:\/\/en.wikipedia.org\/wiki\/Mutual_fund\"><span style=\"font-weight: 400;\">mutual funds<\/span><\/a><span style=\"font-weight: 400;\"> since it is a common mistake. When picking the stocks, seek the highest quality companies, to direct the chances of success in your favor.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The bright side of portfolio management is that you can avoid the danger of diversification if you manage your portfolio on your own. Diversification is an extremely crucial concept in portfolio management, but it has to be done properly. When building your portfolio keep in mind the danger of diversification in investing. That will help you to reach optimal diversification.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Diversification has to be a well thought out step for investors. It can boost growth and lead you to wealth. But if doing improperly, it can cause costly failures. Investors infrequently pay attention to the danger of diversification. All taught that the idea of diversification is to reduce the portfolio&#8217;s risk. And nothing is wrong [&hellip;]<\/p>\n","protected":false},"author":4,"featured_media":21873,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"content-type":"","_exactmetrics_skip_tracking":false,"_exactmetrics_sitenote_active":false,"_exactmetrics_sitenote_note":"","_exactmetrics_sitenote_category":0,"footnotes":""},"categories":[1016,1012],"tags":[249,113,1864,1559,1863,203,1862],"class_list":["post-21871","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-how-to-master-in-trading-advanced","category-traders-secrets","tag-asset-allocation","tag-investing","tag-investing-mistakes","tag-investments","tag-portfolio-diversification","tag-profit","tag-the-danger-of-diversification"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v25.1 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>The Danger of Diversification In Investing - Traders-Paradise<\/title>\n<meta name=\"description\" content=\"The danger of diversification is a real thing if your portfolio is over-diversified or done improperly. 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