Investing Essentials How much is too much?

Diversification: The stripped-down facts

A simple way of understanding diversification in investing is through the old quote, “Don’t put all your eggs in one basket.” But how many eggs and how many baskets should you have in the first place? Ideally, a well-diversified portfolio may contain stocks, bonds, cash and sometimes assets like commodities or real estate. It will also feature different sectors, industries and companies.

How your portfolio is diversified depends on several personal factors, including how much risk are you willing to expose yourself to, what your investing timeline is and your life goals. These are all questions financial advisor Galit Ben-Joseph covers with her clients. Read on to learn more.

The benefits of a properly-diversified portfolio

While Ben-Joseph isn’t able to give actual investing advice unless she knows you and your personal risk profile, she believes everyone needs this awareness. “I enjoy educating both the students I teach at Columbia University as well as my clients,” she says. “Many people find it intimidating, but when you can explain it in digestible terms, they get excited and want to learn more – so it’s a win-win. In general terms, over time, a properly-diversified investment portfolio has the appropriate mix of cash, fixed income and equities. Each and every position in an investment portfolio should be thought through very carefully; a concentrated list of positions can be a more suitable choice versus hundreds, if not thousands of positions, randomly inserted into a portfolio.”

How a strong portfolio means not falling into the over-diversification trap

“When I bring over a new client portfolio,” says Ben-Joseph, “I’ve had so many experiences where 50 positions come over, then another 50, and yet even another 50. I tell the client we have to clean this up, make it more concentrated. It’s overwhelming to try and look at the performance of each of these positions and truly understand their themes and patterns,” she continues. “We want to do the analysis on the company’s balance sheet, their P&L, research their CEO and make sure it’s a valuable and solid company for our clients.”

However, Ben-Joseph cautions that “there can be too much of a good thing.” And while you want to spread the risk out across your portfolio, she cautions that “you could also create a non-optimized situation. There is a point of diminishing returns whereby the more you add, the worse the portfolio performs. It just doesn’t work after a while,” says Ben-Joseph.

Since there’s no magic number, Ben-Joseph suggests speaking with a J.P. Morgan advisor as the first course of action. While diversification does not guarantee a profit or protect against a loss, it's possible to reap the benefits of portfolio diversification – if you do it right, that is.