Investors are often told about the power of diversification.

This involves spreading investments, such as across asset classes, industries or geographic areas, and can be an excellent way to minimise risk.

When you have a well-diversified portfolio, you generally experience less volatility because economic shocks and other impacts don’t affect each investment in the same way.

Taking only equities as an example, if you have one company’s shares in your portfolio, your overall portfolio swings around with the company’ fortunes. But if you are invested in 25 different companies, some can be doing well as others hit trouble.

But sometimes, it’s possible to over-diversify.

Here’s what you need to know.

Spreading investments too thinly

Over-diversification can also happen when you spread your investments too thinly.

You might have a modest investment spread across various companies, or maybe you hold several overlapping managed funds or exchange-traded funds.

At that point, it can be hard to keep up with the portfolio and manage it appropriately and it may not be clear if the additional investments are benefiting the overall investment.

Over-diversification can eventually lead to watered-down returns, where there is less chance that one investment doing well can make a real difference to your overall balance. You might have diversified away some risk, but you could also have cost yourself returns in the process.

Losing conviction

Over-diversification can also be a sign that there is no clear strategy.

Ideally, you (and your investment adviser) should have a clear view of what you are investing in and why. A scattergun approach might indicate that you are drifting away from high-conviction investment decisions, simply for the sake of diversification.

It could also happen when you have overlapping investments, for example, if you have funds that hold many of the same underlying assets.

As Andrew Doherty, managing director of Assure Invest suggests, a more concentrated portfolio can actually be less risky than a wildly diversified one because it represents a professional investor or adviser’s best ideas.

“Portfolios should represent an adviser’s high conviction ideas. If you research thoroughly, do your homework and really get to understand a business, you should take a bigger position in the companies you really like,” he said.

How to tackle it

As your investment advisers, we can help you to determine an appropriate investment strategy that has a good chance of delivering the outcomes that you are aiming for.

In general, this will mean identifying managers and funds, or perhaps investments classes or even the underlying investments themselves, that should work together to help move you towards your goals.

Some people suggest a portfolio of 20 to 30 high-conviction investments across a range of sectors is ideal. However, there is no set rule of thumb – the key is to know what you are investing in and why.

If you have managed funds, you may only need one fund of a particular type – such as New Zealand equities or the S&P500.

We are here to help

If you’d like to talk about your investment strategy, give our expert team of SHARE advisers a call. We can help you determine an appropriate framework that meets your individual needs and fits your circumstances.

Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion and seek independent guidance.