HAVE you ever asked an older relative for a recipe and heard, “Oh I used a bit of this and a splash of that with no real measurement,” but somehow the end product tasted fantastic? Wouldn’t it be great if our investment portfolios acted in the same manner, whereby a random bit of this and that produced the ultimate return. Unfortunately, investing on a whim may not present the most balanced portfolio for an investor. While many an advisor would caution an investor to be strategic and to practise diversification, this week I would like to focus on the other end of the spectrum over diversification.

In an effort to build a balanced portfolio or to hedge against risk, a common mistake investors make is to spread themselves too thin. Going to the extreme may prevent you from reaping the full benefits of your overall portfolio strategy. Here are a few reasons why over-diversifying may lessen your portfolio value.

First, prudent investors should consider fees. It is quite common for an investor to not want to have their entire portfolio with a single broker for security. Ultimately you should consider how much you are paying in management fees if each product in your portfolio allocation is housed with a different firm. Are the associated fees or spreads taken from the different agencies cutting into your bottomline?

Adding multiple stocks, funds, or bonds just for the sake of having them may also increase potential volatility in your portfolio. Realistically, if you cannot keep your eye on a few, how will you monitor multiple products? If conditions change and you do not notice or are unable to lessen your position in a particular product, this will affect the long-term performance of your portfolio.

Purchasing in smaller minimums can also negatively affect a fixed-income investor. When investing the minimal amount, you may be foregoing a greater coupon rate as you may only qualify for a lower yielding product. Maintaining very small positions in certain asset classes may not significantly contribute to the overall value of your portfolio. Additionally, if market conditions change, particularly with bonds, you may find that it is harder to liquidate a smaller face value based on trading minimums.

Lastly if you have multiple brokers and are not forthcoming with all your advisors, you may, in fact, end up being over-concentrated. One advisor would not know if your portfolio holdings elsewhere were heavily weighted or over-concentrated in certain asset classes, geographical or operational sectors, for example.

While there is no crystal ball for investments, a well-managed and strategically diversified portfolio will likely have more positive than negative returns and results. Actively monitoring your portfolio and sticking to your long-term financial goals while maintaining diversification will ensure you minimise risk. Avoid spreading yourself too thin and adding positions in your portfolio for no strategic reason. Investors should be prudent and seek information from credible sources, and seek advice from a licensed financial advisor.

Christine Rankine is the manager -personal financial planning at Sterling Asset Management. Sterling provides financial advice and instruments in US dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm

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