Author Topic: Over-diversification - a real thing?  (Read 1681 times)

theadvicist

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Over-diversification - a real thing?
« on: June 07, 2016, 02:02:38 AM »
Relatively new to investing, so I think I'm a bit easily led!

I just read an article from Hargreaves Lansdown, which (whilst generally talking about the benefits of diversification) highlighted a negative I have not thought of:

"A very large number of holdings risks simply tracking market performance – some fund managers refer to this as “diworsification”. Each holding doesn’t make up a sufficient proportion of the overall portfolio to have a significant impact on its performance. Not only does this offset any benefits from picking good investments, but in the fund space in particular it suggests that a lower-cost tracker fund could be considered as an alternative.

Holding a very large number of different assets can also expose investors to higher costs – as well as being harder to monitor and manage. While there is usually no cost to buy and sell funds, regularly trading shares will mean dealing commission and stamp duty can eat into overall returns, requiring greater performance to achieve the same results."

However, the people 'giving' me this information (nothing is free, right) do offer funds with management charges. So is this just their way of promoting them?

When I first found MMM I bought some low cost funds, which still make up a third of my portfolio. They have performed well so far.

Then I found Dividend Mantra and got into choosing stocks based on robust financials and dividend yields. I have a very diversified portfolio, because I thought that was the right way to go. I enjoy researching and choosing individual stocks. I am not looking for quick gains by timing correctly, I am just looking for reliable companies who have good long-term prospects. I do not trade often (just buying when I have funds available, in £2000 batches), so my stamp duty etc is minimal.

As I said, I'm easily led.

I suppose if I diversify to the point that I'm just mimicking the market, there is no point. Except that funds charge fees. What says the MMM community? DIY or funds? Is there such a thing as over-diversification?

dcheesi

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Re: Over-diversification - a real thing?
« Reply #1 on: June 07, 2016, 02:26:29 AM »
I believe they're talking about diversification in an active portfolio (managed funds and/or individual stocks, bonds, etc.). The lower cost "tracker" they suggest as an alternative is precisely the kind of passive index fund that is advocated by John Bogle (founder of Vanguard), and by many people here.

hodor

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Re: Over-diversification - a real thing?
« Reply #2 on: June 07, 2016, 02:50:17 AM »


"A very large number of holdings risks simply tracking market performance – some fund managers refer to this as “diworsification”.

Tracking market performance is the goal of most ETFs. While some fund managers may call this "diworsification" MOST fund managers don't match the index over the long term and they charge impressive fees to do so.

Playing with Fire UK

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Re: Over-diversification - a real thing?
« Reply #3 on: June 07, 2016, 04:21:27 AM »
I've also heard this phrase when people are given a list of N funds to choose from, have heard of diversification and so buy 1/Nth of each fund.

So you are paying an active management fee to one manager who thinks oil* is about to plummet, and another active management fee to another who thinks oil* is about to spike. The net impact is that you are buying the index, but being charged high fees to do it.

Buying the index in a cheap tracker is fine, paying active management fees for a tracker is not fine.

*/metal/gold/Us/Developing/Unicorns/whatever


Kaspian

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Re: Over-diversification - a real thing?
« Reply #4 on: June 07, 2016, 09:20:00 AM »
I believe that diversification is great.  That said, only 4 or 5 funds TOPS.  The whole point of index investing is (in navy lingo) to "keep it simple, stupid".  :)  If you're going to index--US, International, bonds, maybe your own country (if not American).  Anything more and you're being an index weirdo.