In this part, I am dealing with the first big mistake “Portfolio over diversification”. In most cases, people starts preparing there financial planning without proper goals or guidance. They are frequently relying on advices from unqualified sources or using freely available financial planning software’s. Remember, most of them does not have ability to advise fail proof financial planning strategies and not able to detect and avoid possible errors.
Recalling the famous quote from legend investor Warren Buffett “Wide diversification is only required when investors do not understand what they are doing”. The unavoidable risk from over diversification clearly exposed in this small quote.A properly diversified portfolio should be built with right mix of various investment instruments in right proportion, purchased though proper study and research, to meet all the determined long term, mid term and short term goals.An over diversified portfolio is a place for improper allocation of all available investment instruments through careless actions and ignorance on what really doing. This is neither arranging by proper guidance, research nor, able to meet any goals. No doubt, over diversification puts a person in deep trouble. He neither able to control the portfolio nor, going to attain any financial planning goals.A best example on coward over diversification process is, buying and holding little number stocks of ‘n’ number of companies.Over enthusiasm is a major factor behind this error. Good amount of stocks from quality companies always better than little number of stocks from more companies.Avoid this error by having adequate knowledge on the investment proportion and suitability of selected instruments to meet your goals. Inadequate knowledge, ignorance and over enthusiasm are against the same.
This is Part 4 in a series on Top personal financial planning mistakes. The full series is Part 1, Part 2, Part 3, Part 4, Part 5 and Part 6