Should You Diversify In A Bull Market?

It is important to understand the way by which portfolio volatility reduces your portfolio performance and also understand the way it protects you from losses

One of the most emphasized rules of investing is to have a diversified portfolio and the idea is to be able to spread your investments across industries, assets, currencies, and so on, so as to hedge or augment possible losses.

It is a means of ensuring that all of the risk in a portfolio are not concentrated in a single asset class or security. A well-diversified portfolio is known to reduce the overall risk of your investment.

In all these things, the goal is to prevent or at least reduce the impact of losses. This means that if there was a guarantee that there would be no losses, there would be no need to diversify.

Consequently, when you’re investing in a bull market and in securities that are bullish, does it really make sense to keep investing? Here are some points to consider:

Diversification means you reduce the impact of losses, but where there are no losses, it means you have slashed a knife into your earnings. As such, by diversifying a portfolio that was completely bullish, you would no longer enjoy the maximum possible gain that the best assets deliver in the portfolio.

It would also reduce the pace of growth you can possibly enjoy as it would limit the ability of your stock to grow.

Diversification would also spread you really thin – especially when you invest in a large range of assets. In an attempt to shield yourself from the kind of financial exposure that could lead to losses, you might now significantly reduce your potential gains that you might miss out on great profits.

The more stocks you put into your portfolio, the less concentrated your portfolio will then be when it comes to leveraging the amazing investment opportunities. In a bull market, carrying unnecessary assets that are adversely proportionate to the core growth assets can drag you down.

Overly diversifying your portfolio might make you incur unnecessary costs, especially in a bull market. Asides that, you might also end up having too many assets in your portfolio that you can no longer track all of your investments.

These go to show that there would always be a trade-off when it comes to diversifying your portfolio. However, the risk of losing all the possible profits on your investments just so you can secure additional bucks would most probably leave you regretting when things go awry.

Whether we like it or not, a bull market never stays bull forever. Of course, timing the market leaves you in a precarious situation as you cannot accurately guarantee when the next dip would come.

It is important to understand the way by which portfolio volatility reduces your portfolio performance and also understand the way it protects you from losses.

While it always seems like diversifying is only good when the market conditions are poor, the lack of assurance on how long the market would be bullish as well as the risks that come with concentrated investments or investing in just one line of asset would almost always outweigh the costs that come with diversification of the portfolio.

As such, diversifying assets you can manage while maintaining a very good balance would always be the best option for the growth-inclined investor.

Written by Lawretta Egba.