Common Issues Investors Face While Diversifying Their Portfolio | Spring Money
- Nayan Chandra Mishra
- Mar 2, 2023
- 8 min read
Updated: Jul 19, 2024

With rising inflation and the declining value of money, investing has moved from being a choice to a necessity. Masses are now shifting to new investment opportunities as opposed to traditional ones, thus opening up various options for them to grow their money.
However, as now you’ve more options to invest in, it has become pertinent to understand the subtleties of every asset class and sector and strategize the investments that not just give you the highest possible returns but also take into account your risk-taking abilities.
Here comes the significance of diversifying your investments. It is embedded in our psychology to minimize risk in almost every facet of our lives, including investments. Diversification rests upon the premise that dividing the investment amount into different asset classes and products will reduce the risk of losing your money instead of investing the entire sum into a single asset class.
Why Does Diversification Matter?
As a part of investing, diversification is an essential element that allows you to invest in various forms of securities and reduces your risk against market volatility. However, many investors, especially those who are not in the full-time investment profession, do not have the expertise and time to understand how they can strategically diversify their portfolios and what relevant factors come to play in order to accrue the highest possible returns.
This ultimately leads to lower returns, and you lose the opportunity to utilize the full potential of your investments. Addressing all these challenges, I’ve taken up the most pertinent issues and dilemmas people face when it comes to diversifying their portfolios.
Let’s check out these in detail.
What Problems Investors Face in Diversifying Portfolio

1. Review & Rebalancing
The cardinal principle of value investing requires you to invest for the long term.
However, with changing economic tides and new developments revolutionizing existing sectors, it becomes vital for you to review your portfolio and make changes, if required, as per new developments.
Now the question arises, how many of us check our portfolio within a certain period, and even if checked, how do we know whether our investments require review and changes accordingly?
As we prefer to automate our investments, it gets difficult to review our portfolio and analyze if it requires rebalancing as per contemporary economic trends. Rebalancing is among the most essential aspects of diversification where you are required to remove or add new asset classes or products to keep your portfolio floating with promising investments. So, for instance, if the global economy is rebounding, you might want to shift from safer securities such as gold or commodities to promising sectors including infrastructure or consumer to earn a higher rate of return than the former.
However, as a layman, we might not always be even aware of the latest economic trends and, consequently, make wrong decisions or even avoid reviewing our portfolio at all.
In addition to this, today, we’ve so many asset classes with multiple products within each asset class. Every asset class has a unique attribute, and including them in your portfolio depends upon what type of investor you are. For instance, if your risk appetite is low, you might prefer to invest in relatively safer securities such as Sovereign Gold Bonds, Nifty 50 or fixed deposits.
This makes our job difficult to review attributes of every asset class as per current economic trends and rebalance or include new products in our portfolio. As a result, many investors either miss out on the benefits and dangers of new developments or lose a significant opportunity to increase their wealth substantially.
2. Overdiversification
Rationality requires you to invest your hard-earned money in various types of securities and stocks representing different sectors. This sounds rational, right?
Then why do the world’s top value investors, including Warren Buffett, not follow this rational decision and rather do the opposite? They prefer to call themselves focus investors, where they focus on a few outstanding companies. Still, they managed to make huge sums of money. How?
As Warren Buffett said, “Diversification is protection against ignorance”. Because many investors ignore the prospects and risk involved in their investments, they choose to diversify their portfolio thinking, “now that they have ticked all the options, the answer will be correct”.
We invest in so many asset classes mainly for two reasons:
Greed to accrue profits from all possible investing opportunities.
Fear of losing out money in case any asset underperforms.
In any case, over-diversification ultimately causes two sure shot and interconnected possibilities:
It increases the probability of risk of losing money in one or the other sector. Moreover, if you’ve invested in two contradictory assets, you create a paradoxical portfolio and your returns are locked in mediocrity.
Over-diversification causes you to divide your money into smaller investments. You deliberately ensure that you won’t be receiving exceptional returns even if the price of the security rises by an exceptional rate. Let’s say, you invested ₹10,000 into 10 diverse stocks equally. And one of the stocks grew by 100%. You seemingly earned ₹1,000 as returns. But had you invested a chunk into that stock, let’s say ₹5,000, the amount would have grown to ₹10,000. However, over-diversification limited your ability to receive higher value in terms of returns. The ultimate focus is on the net value you receive from your investments. What can you even buy from that extra ₹1000 as opposed to ₹5000?
Ultimately, it’s the real hard cash that you get in your hand that matters and not the percentage value of the returns.
Over-diversification might reduce your risk of losing money, but what benefit would you accrue if you receive mediocre returns from your investments? It is tantamount to investing in a fixed deposit or sometimes even worse. Moreover, the basic economic principle highlights if the economy moves negatively, it inevitably impacts all sectors, from Oil to Fortune 500 companies. So, where is the rationality?
Apart from that, over-diversification increases your burden of reviewing every single asset in your portfolio, and as we lack expertise, we might not be able to make effective decisions while rebalancing it. So if a person has 50-100 products in his portfolio from various asset classes, it inevitably becomes difficult to analyze the movement of every product, asset class, sector, growth prospect etc.
3. Diversification not based on risk appetite
How do we know our risk appetite? What factors cause our risk appetite to rule over our investments? Is it in any way related to what returns we might receive?
These are a few among many questions that you must ask before diversifying your portfolio. The reason is that our portfolio should reflect not only the returns we want to achieve but also the risk we can handle in case of any downturn.
Therefore, it becomes vital to diversify our portfolio, which takes into account how much risk we can handle while maintaining substantial returns.
But this isn’t the usual case!
Several investors take emotional decisions without considering their risk appetite, causing them to choose highly volatile and risky sectors. On the other hand, many investors choose too safe investments because they fear losing their money, thus inhibiting them from realizing the highest potential of their investments.
As there is no fixed set of factors for deciding your risk appetite, we usually either ignore or miss out on our most important considerations while making investments. Every personality has different factors that govern its risk appetite. The value of ₹1000 will not be the same for a single man and a married man with 2 children. The former can afford higher risk than the latter.
Another vital factor that usually governs your risk appetite, even without you knowing, is the goal you want to achieve through your investments. But do we consider this intangible factor while deciding our risk appetite? For instance, you are saving money to buy a house for your family next year. Until then, you want to invest that money, assuming you will receive some returns, thus helping you to achieve your goal easily. Would you prefer investing that money into high-risk or stable investments?
Therefore, your risk appetite is also governed by the goals you want to achieve through your investment in the future. In the previous example, you can’t afford to lose money even if you are young and have the ability to take high risks in life simply because you are not investing to earn huge returns but to purchase a home. Therefore, that money you are saving has already a purpose to serve.
4. Too many options available
As mentioned earlier, today we’ve lots of options to invest our money ranging from Gold, commodities, stocks, and T-bills to bonds, G-Secs and real estate. And every asset class has several products to choose from.
Okay, this sounds great, right? We now have so many options, each having different attributes. We can choose any of them that suits our needs best.
But that’s not always the case!
As too many options are now available, it becomes difficult for investors to evaluate each of them, that too as per their needs. This usually causes them to either not make decisions at all or choose a few investment options that might not be enough for diversifying their portfolios.
Moreover, as we lack the expertise to analyze every asset class and product, we delve into easy choices even though we can go for better options. This also includes choosing securities that overlap strategy and growth factors.
5. Emotional Bias
Who says psychology is not essential in investing?
The underlying premise lies in the fact that you might be the most rational being in the entire town, but that doesn’t automatically make you the most intelligent one!
We all love our hard-earned money, and witnessing a few stocks moving rapidly increases our greed to invest in those stocks without giving a proper background check. On the other hand, when the market goes downwards, people do panic-selling and lose a significant amount of their profits and sometimes their original investment as well.
Resultantly, many investors fall into this trap and diversify their portfolios based on short-term fluctuations. It ultimately leads to major losses whenever the market corrects itself.
How can RIA help you diversify your portfolio?

Having gone through some of the common problems investors face while diversifying their portfolio, we witnessed 2 most common elements in all the issues:
Lack of Expertise
Lack of Time
Resolving both these issues can solve most of the problems we face in diversification. But can we delegate to someone who can help us resolve our dilemma?
Here comes the role of the SEBI-authorized Registered Investment Advisors (RIA), who can help you diversify your portfolio by bringing onboard years of expertise and trust from SEBI at your behest.
Who is an RIA?
It is a Registered fee-only advisor or financial planner who helps you provide a personalized and detailed financial plan, considering all your present and future goals.
Okay, so what makes them unique from other advisors?
Firstly, they are officially authorized and considered competent by SEBI to advise on financial matters to the people. More importantly, they only work for you and do not receive any commission from any other organization.
RIAs will provide you with a financial plan that not only includes diversification but how you can strategically save your income and consistently earn returns as per your risk appetite and goals. So if you’re a bit reluctant or want to make a goal-based investment for a fixed period, he will provide you with a plan that adheres to your considerations.
Moreover, having expertise in the capital market for years, they understand economic trends well, thus making it easier for them to review and rebalance your portfolio as per your needs. Therefore, RIAs not only bring in expertise but also save you time checking and rebalancing your portfolio.
Conclusion
The ultimate aim of any investment is to grow your money in a way that positively impacts your future self. And diversification has been one of the best ways to grow your investments and reduce risk at the same time.
However, in order to strategically diversify your investments, it is vital to consult an expert who handholds you at every step of your investment journey. They can easily help you resolve all your dilemmas and provide a safety net to your investments, ensuring you don’t fall into any of the traps common investors fall into.
Comments