It was a relaxed Sunday evening. Four cousins
- Aditya, Priya, Ria, and Rohan -had reunited after months. Over coffee and
laughter, the conversation drifted from old memories to new-age investments.
“You guys won’t believe how many
stocks I hold now,” Rohan said, proudly sipping his cappuccino. “Last count - 52!”
“Whoa,” Ria raised an eyebrow. “Are
you running a mutual fund or what?”
They laughed, but Aditya leaned in. “Rohan,
that sounds like over-diversification to me. You might want to rethink it.”
“Wait, I thought diversification
reduces risk?” Rohan asked, confused.
Priya nodded, “It does - but only to a
point. Go beyond that, and it starts working against you.”
“How so?” Rohan asked. And so began a
mini masterclass.
1. Diluted Investment
Quality
“Think of it this way,” Aditya
explained. “There are only so many genuinely great companies out there. If you
own too many stocks, you’ll inevitably include mediocre or poor-quality ones.
That dilutes the impact of your best picks.”
Rohan frowned. “Makes sense. I did buy
some stocks just to ‘fill out’ sectors.”
2. Portfolio Becomes
Unmanageable
Ria jumped in. “And with so many
holdings, can you really track them all? News updates, earnings reports,
business changes... it's exhausting. A bloated portfolio often means less
control and more stress.”
Rohan chuckled nervously. “I’ve
definitely lost track of some of them.”
3. You May Just Be
Mimicking the Index
“Here’s the ironic part,” Priya added.
“If you’re spread too wide, you might as well have bought an index fund. But
you’re paying way more in brokerage or fund fees and putting in more effort.
It’s like paying extra to manually replicate what a single fund could do.”
“That stings a bit,” Rohan admitted.
4. Subpar Returns
“And let’s talk returns,” Ria said.
“If you mix high-quality stocks with weak ones, your overall performance
suffers. It’s like mixing gourmet coffee with instant powder -you ruin the
flavor.”
“Not to mention the emotional side,” Aditya
added. “When markets fall, people panic. With too many investments, it’s harder
to know what to sell or hold. So they sell the winners and hold the losers - classic
mistake.”
5. Lack of Personal
Oversight
Priya nodded. “And if you rely too
much on mutual funds or managers, you stop paying attention. One bad quarter,
one shift in market trend -and you’re the last to react.”
Rohan leaned back, thoughtful. “So
you’re saying - less is more?”
“Not zero diversification,” Ria
clarified. “Just strategic diversification. Hold enough to manage risk,
but not so much that it becomes clutter.”
“There are several other downsides,” Aditya
added, “but these are enough to rethink our approach.”
As the coffee cooled and laughter
resumed, Rohan made a mental note to review his portfolio that night.
The content made available in this article is for general informational purposes only. While every effort has been made to ensure the accuracy and completeness of the content, it should not be considered as a substitute for professional consultation.
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