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Why we overdiversify

It's easy to overdiversify and to end up with an expensive version of a tracker fund. But it is also easy to avoid this mistake
Why we overdiversify
  • Many investors are overdiversified and hold an expensive tracker fund without realising it. 
  • There are simple ways to avoid this mistake. 

One thing I’ve learned from our reader portfolios is that some of you are overdiversified, holding so many equities and funds that you in effect have a tracker fund.

To see this, think about the basics of diversification. As you add assets to your portfolio you naturally dilute the impact that any one has on your total returns: that’s what spreading risk means. But you increase the significance of the correlations between assets. Because correlations of relative returns are often low, this means that if you hold lots of assets your portfolio can easily resemble a tracker.

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