{"id":452,"date":"2020-05-11T06:39:24","date_gmt":"2020-05-11T06:39:24","guid":{"rendered":"https:\/\/www.invest19.com\/blog\/?p=452"},"modified":"2020-05-11T06:39:26","modified_gmt":"2020-05-11T06:39:26","slug":"5-reasons-why-your-diversification-strategy-isnt-working","status":"publish","type":"post","link":"https:\/\/www.invest19.com\/blog\/5-reasons-why-your-diversification-strategy-isnt-working\/","title":{"rendered":"5 Reasons why your Diversification Strategy isn\u2019t working"},"content":{"rendered":"
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Diversification is a buzzword that\u00a0continuously\u00a0pops up\u00a0in a investors\u2019 mind to limit the exposure of risk within the investment portfolio. In\u00a0theory, the\u00a0idea\u00a0appears\u00a0simple \u2014 you\u00a0spread\u00a0your\u00a0capital over a\u00a0wide variety\u00a0of asset classes so that you\u00a0can keep away from\u00a0taking a\u00a0bath\u00a0when\u00a0the\u00a0market\u00a0declines. Ideally, it is a strategy to limit risk and mitigate losses on investment returns. But, it is not wise to take it lightly! Because if you are not careful while diversifying your portfolio you could lose big in spreading your capital into multiple asset classes. Here, we\u2019ve mentioned some key reasons why many investors go for diversification but end up making it worse. <\/p>\n\n\n\n

Below we\u2019ve mentioned the reasons\nbehind the failure in a portfolio diversification strategy. Hope, this would\nshed some light over the whole concept of diversification and what you should be\naware of while doing it. <\/p>\n\n\n\n

Don\u2019t fully understand \u201cPortfolio Diversification\u201d<\/h2>\n\n\n\n

The purpose of investing is to\nsee the growth in the invested capital period. As a result, many investors do\nthe mistake of invested heavily on growth-based investment instruments. That\nbecomes the reason for the failure of their diversification strategy. Many\nyoung investors tend to be aggressive and see doing the mistake of diversifying\ntheir portfolio by allocating their investments through different sectors only.\nThe portfolio may be adequately diversified amongst large-, mid-, and small-cap\nstocks but the problem this, you\u2019re\ndiversified only within stocks.<\/em> The true diversification can only be\nachieved when you invest in other asset-class to counter the risk of decline in\nyour equity investments. <\/p>\n\n\n\n

Get Emotional at the Time of Investing<\/h2>\n\n\n\n

Emotions have always played a key\nrole in stock investing. It is something that can overwhelm the mind of many\nsavvy investors and make them make wrong investing decisions at crucial times.\nFor instance, when the stock tends to rise in value, we tempted to buy them to\nmake part of our investment portfolio. At the opposite end of the spectrum, if\nthe stock is not performing for a while, or bear has marker under its grip, we\nbecome overly cautious and start investing in fixed income assets or other\nasset class. <\/p>\n\n\n\n

The actual reason behind these\ndecisions is the emotion which overwhelms our intentions and sometimes creates an\nimbalance in our initial asset allocation. <\/p>\n\n\n\n

Entirely Avoid Certain Asset Classes<\/h2>\n\n\n\n

As we mentioned earlier that\ninvestors often make the mistake of investing heavily in growth-related instruments\nlike stocks and avoid certain asset-classes that could benefit in diversifying a\nportfolio. It is important to have a proper allocation between equity and debt\n(bonds and fixed income assets) instruments. <\/p>\n\n\n\n

For instance, gold investing is a\nway to counter the risk of equity investments as in certain markets, the gold\ncan outperform other asset classes. But, only if you consider other asset\nclasses, you cannot miss out such opportunities. <\/p>\n\n\n\n

Investments Don\u2019t Follow the Market<\/h2>\n\n\n\n

The purpose of diversification\nstrategy is to ensure that we are properly diversified so that our investments\nwill rise or at least not hit hard by the market volatility. But, that is the theoretical\npoint of view of seeing things. There are some certain market situations when\nall asset-classes fall at the same time irrelevant of equity or debt\ninstrument. There are times even when the substantial position in fixed-assets\nresults in an overall loss. <\/p>\n\n\n\n

Economic slowdown due to a steep\nfall in the market could drop all asset-classes simultaneously. The coronavirus\npandemic is one such example when the bears have tightly gripped the market by the\nneck. As a result, the benchmark indices have fallen over 30 per cent from its lifetime\nhigh. This lead to a fall in other asset-class like gold, silver, and bonds\nsimultaneously. <\/p>\n\n\n\n

It is very crucial to move\ncarefully in such circumstances as any misstep could lead to significant losses\nthat would be hard to incur for a medium investor. <\/p>\n\n\n\n

Too Many Investments or Over-diversification<\/h2>\n\n\n\n

Diversifying investment portfolio\nis a good strategy to spread risk across multiple investment classes so that in\nadverse situations, your one or two investments won\u2019t affect your overall\nportfolio returns. However, in doing so many investors fall into the trap of\nover-diversification. Perhaps trying too hard to minimize risk but diversifying\nin too many investments can hurt your potential gains in the long-term. It is recommendable\nto not exceed your investments above 20. On top of that investing in multiple\nasset classes would also increase in transaction costs which could mitigate\nyour returns and ultimately defeat the whole purpose of diversifying. <\/p>\n

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Diversification is a buzzword that\u00a0continuously\u00a0pops up\u00a0in a investors\u2019 mind to limit the exposure of risk within the investment portfolio. In\u00a0theory, the\u00a0idea\u00a0appears\u00a0simple \u2014 you\u00a0spread\u00a0your\u00a0capital over a\u00a0wide […] Read More<\/a><\/span><\/p>\n","protected":false},"author":1,"featured_media":453,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[2,7],"tags":[114,115,116,117],"class_list":["post-452","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-stock-market","category-investment","tag-portfolio-diversification","tag-diversification-strategy","tag-reasons-of-diversification-failure","tag-overdiversification"],"_links":{"self":[{"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/posts\/452","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/comments?post=452"}],"version-history":[{"count":1,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/posts\/452\/revisions"}],"predecessor-version":[{"id":454,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/posts\/452\/revisions\/454"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/media\/453"}],"wp:attachment":[{"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/media?parent=452"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/categories?post=452"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.invest19.com\/blog\/wp-json\/wp\/v2\/tags?post=452"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}