Finance De-WORSE-ification: diversification mistakes to avoid One of the great arguments for diversification is that it’s intuitive and easy to understand for even the most novice investors. But this doesn’t mean that it’s always easy. Keep an eye out for the following errors or misunderstandings in how you apply diversification – they can have serious consequences, leading you to believe that you have more protection against volatility than you actually do. Overdiversification When it comes to diversification, there is such thing as too much of a good thing. If, in the attempt to diversify, you add so many assets that you simply end up replicating an index or the market as a whole, you haven’t really reduced volatility in any meaningful way. In fact, you may well have reduced the possibility of outperforming the market, and often at a much higher cost than simply buying an index fund or market-tracking ETF. “Collecting” assets If you’ve been investing for a while, chances are that you’ve built up a number of assets in your portfolio. But don’t confuse that for true diversification. Diversification is not a collection of random assets built up without any real thought as to how those assets interact with each other. Rather, it’s a deliberate pairing of investments pursued with clear allocation targets and an intentional strategy of reducing risk. Too much correlation A common misperception about diversification is that it’s all about holding a great number of assets in the portfolio. That’s only half the story. The key to diversification is to hold assets with uncorrelated performance – that is, assets that perform differently from each other at different times in the market cycle. Without some analysis of how the performance of those assets differs (or doesn’t) from each other, you may have the illusion of diversification, rather than the reality. Lack of rebalancing Diversification is not a “set it and forget it” kind of strategy. Over the years, certain allocations will inevitably grow faster than others; over time, these winners can come to dominate your portfolio to the point at which it is no longer truly diversified. To avoid this, get into the habit of periodically rebalancing your portfolio by trimming back some of the winners in order to restore your original diversification target. Beyond the basics: a final word about diversification Diversification is one of the simplest, most common-sense and most effective ways of protecting your portfolio from both the financial and psychological consequences of tariff turmoil or political problems. But to be effective, it needs to be enacted deliberately, with a well-thought-out plan and a specific risk management objective in mind. If you’re interested in learning more about strategic diversification, there are several online apps and research tools that can help you out. In addition, most discount brokerages have analysis tools that can give you an excellent understanding of how well your current holdings are diversified, in what way you can improve your diversification level, and what practical difference any added diversification might make over time. Perhaps the best tool of all, however, is a qualified professional financial planner or wealth advisor. With in-depth knowledge of assets and markets, along with a full range of back-testing tools and analysis, a professional can determine whether your current level of diversification is sufficiently adequate to let you sleep comfortably in these “interesting times” in which we live. CSANews | SUMMER 2025 | 31
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