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A Fin24 user wants to know if putting your eggs in several baskets can destroy value. He writes:
Some claim a portfolio with more than four funds fails to add value, and investing in 10 funds results in a portfolio that behaves much like the average fund.
Can diversification destroy value?
Imraan Jakoet, an investment analyst at Glacier by Sanlam, responds:
There is some truth to the reader's statement, but I would be hesitant to suggest a specific level at which no value is added.
Where the funds selected are trying to achieve a similar objective and have a similar investment universe (such as the general equity category), the benefits of adding funds certainly does diminish the more you add.
By adding too many similar funds, you will ultimately lock in returns similar to the category average.
When constructing an optimal portfolio of unit trusts, there is also a chance that the correlation benefits can be eliminated if extra funds that behave very similarly are haphazardly included into the portfolio.
In this way one would "over-diversify" the portfolio and potentially destroy value relative to a well-diversified portfolio.
We recommend that investors consult with a qualified financial intermediary to ensure that a portfolio is constructed in line with the investor's risk profile and investment goals.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
Some claim a portfolio with more than four funds fails to add value, and investing in 10 funds results in a portfolio that behaves much like the average fund.
Can diversification destroy value?
Imraan Jakoet, an investment analyst at Glacier by Sanlam, responds:
There is some truth to the reader's statement, but I would be hesitant to suggest a specific level at which no value is added.
Where the funds selected are trying to achieve a similar objective and have a similar investment universe (such as the general equity category), the benefits of adding funds certainly does diminish the more you add.
By adding too many similar funds, you will ultimately lock in returns similar to the category average.
When constructing an optimal portfolio of unit trusts, there is also a chance that the correlation benefits can be eliminated if extra funds that behave very similarly are haphazardly included into the portfolio.
In this way one would "over-diversify" the portfolio and potentially destroy value relative to a well-diversified portfolio.
We recommend that investors consult with a qualified financial intermediary to ensure that a portfolio is constructed in line with the investor's risk profile and investment goals.
- Fin24
Do you have a pressing financial question? Post it on our Money Clinic section and we will get an expert to answer your query.
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