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 (
) 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
This is a well-taken point, but we have a few thoughts on the
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
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
For more information on ETF investing, visit our
ETF 101 category
Max Chen contributed to this article.