Diversification Challenges

1. Since diversification at its core means not betting all or most of your money on a single company or industry, this also implies a possibility that you’ll miss out on some big short-term gains if your bet turns out to be a big winner. Simply put, your possible return does likely decrease by diversifying. Say you invest $1,000 across ten different stocks and one of them happens to have a sudden increase in value and double its price. You will leave you $200 in value for that stock, wondering whether it would be a better idea to invest all your money in that stock and double your money. Yet again, what are the chances? Think of how much risk of a loss there is when you bet all your money in a single stock, and whether you’re ready to take that risk.
2. You’re likely to have to spend more time researching and rebalancing your portfolio if you want to keep it diversified. You’ll need to keep track of more investments and analyze more industries and individual companies to decide where you want to place your money.
3. Buying more assets usually means more commission and transaction fees. This is especially true if you need to make trades more often to maintain a well-balanced portfolio.
4. Investing without a strategy, just for the sake of diversification, may actually carry even more risk. By investing in a random set of risky assets, you may end up exposed to potentially higher losses.

In our further chapters, we’ll take a close look at how you can employ a solid diversification strategy in your investing.