Diversification and ETFs: Too Much of a Good Thing?

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Diversify ETF Most investing professionals will tell you to diversify your portfolio so that all of your money isn't exposed to just one area of the market. But as with anything in life, too much diversity in your exchange traded fund ( ETF ) portfolio may not be a good thing.

According to Investor's Business Daily , the problem with overdiversification is that there is a chance that you might get gains out of at least one asset class but also find that the rest are lagging behind. Research has indicated that it may be better to own several high-quality stocks than dozens of stocks.

This is a well-taken point, but we have a few thoughts on the issue:


It is true that institutional investors have huge portfolios, but those funds have a team of analysts and researchers to keep a large portfolio up-to-date. The average retail investor just doesn't have all those resources at hand. [ 5 Ins and Outs of Global Investing. ]

And while it might be more beneficial to own one high-quality stock…how do you actually know the stock you're picking is going to outperform a portfolio of them targeting a sector? Successfully and consistently picking winning stocks is much harder than it looks.

This is why we feel that ETFs are still a better bet. Sure, if you believe in a stock, why not give it a shot? But by and large, using an ETF to get your exposure will be more cost-effective for you by giving you lots of exposure at a low price. It will also be more cost-effective in terms of time - do you have hours to devote each day to researching single stocks? Few do. [ How to Put Cash to Work. ]

But do keep in mind the issue of too little exposure to too many areas - you could be cheating yourself out of returns. It's key to strike a balance between too much of a good thing and too little to reap rewards.

For more information on ETF investing, visit our ETF 101 category .

Max Chen contributed to this article.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , ETFs

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