Over-Diversification

Over-Diversification refers to a situation in which an individual or organization spreads its investments across an excessive number of Assets, reducing the potential benefits of diversification while increasing complexity and management costs. This occurs when the number of investments becomes so large that the investor is unable to effectively monitor or assess the performance of each Asset, leading to diminished Returns.

For example, if an investor holds Shares in 100 different companies across various sectors, the impact of any single investment on the overall portfolio is likely to be minimal. This can result in missed opportunities to Capitalize on high-performing Assets.

A case illustrating over-diversification is that of a mutual fund manager who, in an effort to minimize risk, adds numerous holdings across numerous sectors and geographies. While the intent is to mitigate risk, the sheer number of holdings can dilute the fund’s performance, as the gains from top-performing Stocks are counteracted by the underperformance of others.