Diversification Mistakes You Need to Avoid

Although all investors know that diversification is something they must do, they sometimes overdo it. it’s a good strategy, but if you’re guilty of the following mistakes, it’s time to change it.

Check out these diversification mistakes and avoid them at all cost. Read on!

You Have Too Many Investments.

Instead of having too many assets and investments in your portfolio, keep your assets down to a level that you can manage. Also, there should be no outsized holdings.

The holdings should be diverse, but if there are too many, their values tend to become interconnected. And too high asset correlation is something that beats the purpose of diversification.

Buying 30 stocks from the same niche doesn’t accomplish diversification. But buying 30 stocks from different industries and sectors does the job.

Your Hold Commodities for Too Long

It’s actually very rare to hear of an investor that holds commodities for too long and then actually gets rich from it.

Remember that commodities, since the beginning, are there for trading, not investing. The most successful commodity investors are traders.

They try to find opportunities to buy and sell commodities, and they don’t feel the need to stick to their commodity holdings.

You Depend on Market Cap for Diversification

Some investors that diversification can also be effective when you pick stocks according to their market capitalizations.

They pick a mix of small, medium, and large cap stocks, thinking that any losses in one of them can be offset by the gains in another.

However, the thing is that it doesn’t work that way. Small, medium, and large cap stocks can rise and fall together.

The better way to do it is to find strong, stable businesses and invest in them. Their market stock should just be a secondary consideration.

You Invest in Illiquid and Expensive Assets

Of course, high liquidity is something of a priority when it comes to investing. You want to turn that asset to cash quite quickly.

So, it doesn’t really make sense to invest in illiquid assets at all. At the same time, investing in costly assets and funds only eat away from your capital. Stick to assets that have reasonable prices.

Foreign Funds and Stocks

Some investors think that foreign funds and stocks are key to higher returns and profits. But the problem with this is that if you already own large blue-chip stocks, you are already largely exposed to the economies of other countries.

So, What Do We Do?

Avoiding these mistakes is just one part of the job. The next step is figure out the way to achieve actual beneficial diversification.

You have to spread your wealth across different assets, not just stocks, and industries and sectors. When the tech and financial sectors are slumping, maybe the industrial and utilities sector are faring better.

When the stock market is slumping, perhaps the commodity market has some good surprises.

The point is, you must find assets that can offset each other’s weaknesses, and both benefit during bullish market conditions.