Diversification Works if You Appreciate Diversity

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Diversification Works if You Appreciate Diversity

Diversification Works if You Appreciate Diversity

“Unity in diversity” is the dictum we use for our beautiful country “India”. We have appreciated our diversity and diversity has delivered us unity & progress.

Similarly, a diversified portfolio is an all weather portfolio. It sustains your wealth in the short term and makes it grow in the long term. But, I have seen that many investors while seeing their portfolio start comparing one fund with another. They do comparison between apples and oranges and conclude that few funds are underperforming hence should be removed from the portfolio. Worse, they convinced themselves that money should instead be invested in funds that are at the top in performance charts.

That is a self defeating approach for your long term success in wealth creation. The reason we diversify our portfolio is to appreciate the fact that not every kind of asset class will perform similarly together. You may have domestic funds doing well and international funds not performing well and vice versa. Similarly, equity might be performing superlatively doesn’t mean that you should discard your debt holdings. The meticulously built portfolio based on your financial goals and risk profile should be not altered just on the basis of recent performance.

The worst possible decision is to crowd your portfolio with similar kinds of funds. They may go together but when they fall, all would fall simultaneously and then it might take a long time to return your portfolio back to normalcy. In the meantime, you would be sulking with huge mental agony.

As an investor, we need to be mindful of three simple facts-

– Past performance is no guarantee to future performance.

– Every asset class has their own cycle of performance. Unfortunately, we can’t predict the timing hence it is prudent to invest in a diversified portfolio so that underperformance of one class is compensated by other asset class/classes.

– By putting all your investments in similar kinds of funds, you are making your portfolio unidimensional. This may pose a big risk to your portfolio when it is going down substantially in comparison to other diversified portfolios.

Therefore, it’s important to appreciate the beauty of diversification. For long term investment success, it is not necessary that all your funds should perform well simultaneously. In fact, every time you would find that some or the other funds are underperforming all the time and that should be appreciated not to fret upon. When you maintain your diversified portfolio for a long time, this portfolio delivers superior performance and helps you achieve your financial goals.

All through, your journey of investments also remains peaceful by having a diversified portfolio.

Manoj Pandey