Avoiding excess

Personal Finance: Too much diversity, debt, and concern over taxes make for irresponsible investing | David Bahnsen

The last issue's personal finance column began the task of looking at six big financial mistakes for investors. The number of mistakes investors can make is by no means limited to six, but the vast majority of them fit within one of these six areas. The first three, which we focused on in the last issue, are panic, euphoria, and under-diversification. Here are the last three:

Over-diversification

As much as under-diversification can devastate a portfolio (think of Bear Stearns employees holding much of their nest egg in the stock of the now failed company), so too can over-diversification be a major problem. Under-diversification adds risk that is wholly unnecessary, but over-diversification jeopardizes investment performance in ways that are also undesirable. The goal is to construct a portfolio that is well-balanced, not one that owns too many things. This balance is key to properly gauging risk, and obtaining reward.