We’ve all heard about the benefits of diversification. Investment professionals tell us not “put all our eggs in one basket” but are they always looking out for our best interests? This may be sound advice but can you go too far in spreading your risk? At times there is such thing as having your investments over-diversified. Diversification refers to investing in various types of investments or assets.This could be companies across different sectors, different types of properties in various locations, several types of unit trusts or funds all in an effort to minimise risk. Ideally by spreading your investments across various sectors or industries you reduce risk by the fact that usually not all types of investments, industries and sectors will be affected at the same time by the same thing. It may seem sensible to own three different types of investments rather than just one, but at some point adding a yet another type of investment to your portfolio can in fact work against you.
You may have a savings account, some insurance policies, some shares, some offshore investments, some property etc. These are not in themselves bad to have and in fact commendable because the intention of saving and investment is there. However putting money into many different pockets, without direction ends up sometimes being clutter. You are left feeling that you are running around in circles in your financial life and not really achieving anything. Over diversification happens because of not starting with the specifics of what you want to achieve hence getting easily influenced by the flavour of the month or the financial salesperson. You end up accumulating a lot of investments that end up not working for you because of the lack of a definite objective and lack of focus on your part. Too many of those types of investments will definitely affect your ability to create wealth. You may also sometimes feel that you are starting the investment game late and need to play catch up.
Diversification can be a prudent strategy but like any good thing too much of it is not good. There is no common consensus as to how many types of investments you should own to have a well balanced portfolio. This really depends on what you want to achieve. I have come to learn that doing fewer things but committing to do them very well works better than becoming a Jack of all trades. For example you could decide to focus on property and learn about it to the point you start doing development projects in select areas. This may create more value for you than having many small plots of land scattered all over. Remember owning too many types of investments, takes away the potential of making bigger investments in fewer things that can give higher returns. With many different types of investments both the very important resources of time and money are stretched thin. Warren Buffett once quoted “wide diversification is only required when investors do not understand what they are doing”.
Waceke Nduati Omanga| waceke@centonomy.com | Twitter @centonomy.