Executive summary: Western policymakers and business leaders are rethinking over-reliance on China as a global manufacturing and sourcing hub, leading to a shift in investment strategies.
In today's fast-paced and ever-evolving financial landscape, the concept of diversification has become a cornerstone of investment advice. Diversifying your portfolio across different asset classes, industries, and regions is often touted as a way to reduce risk and enhance returns. However, recent diversification and performance benefits of non-US stocks have been muted, but that trend may not persist.
While diversification is generally viewed as a prudent strategy, there are risk associated with over-diversification. When investors own too many securities or spread their portfolio exposure too thin, they can run into difficulties in achieving their desired outcomes. This begs the question: is there such a thing as too much diversification?
Hear the other side of the common advice to diversify your portfolio. There are risk associated with buying many different stocks, and sometimes, when things get done overboard, resulting in over-diversification.
One of the risk of over-diversification is the dilution of the potency of dominant stocks in your portfolio. By spreading your holdings too wide outside the orbit of these strong performers, you run the risk of diluting their impact on your overall returns.
In our recently published 2024 Diversification Landscape report, Christine Benz, Karen Zaya, and I took a deep dive into how different asset classes and regions interact within a diversified portfolio. We found that while diversifying helps spread risk, allowing you to absorb losses in one area while benefiting from gains in others, there can be drawbacks to overdoing it.
It's important for investors to strike a balance between diversification and concentration in their portfolios. While diversification can help mitigate risk, over-diversification can potentially limit your upside potential by diluting the impact of your best-performing assets.
In today's market, where uncertainties abound and traditional investment strategies are being challenged, it's more important than ever to reassess the role of diversification in your portfolio. By understanding the potential benefits and risk of over-diversification, investors can make more informed decisions about how to best position their assets for long-term success.
