Over-Diversification (Di-worsification)
When owning too many assets drags down returns without actually reducing risk.
The Core Pitfall
Owning 10 different S&P 500 mutual funds doesn't make you diversified; it just means you are paying 10 sets of fees for the exact same underlying assets.
Why It Happens
True diversification requires non-correlated assets, not just a high quantity of similar assets.
⚠️ Key Warning
Beyond 20-30 individual stocks across different sectors, adding more stocks provides negligible reduction in unsystematic risk.
How to Protect Yourself
- Recognize the trap: Understand the mechanics before you invest.
- Risk Management: Always size positions according to maximum potential loss.
- Stay Disciplined: Stick to your long-term plan and ignore market noise.