Here at the Motley Fool, we’re all about convincing more Australians to buy ASX shares and get started with investing in the stock market. Once you’ve taken the plunge and bought your first ASX shares, we’re also fans of building out a broad portfolio of diversified, quality ASX shares as soon as practicable.
After all, diversification brings many benefits, such as reducing the risk that a sector-specific crisis can kneecap your portfolio.
But is there such a thing as too much diversification? What happens if instead of having a portfolio of 15 to 25 different companies (as we recommend for most investors), you buy 50, 80 or even 100 different ASX shares to invest in?
The temptation to over-diversify may seem strange, but it is certainly a common problem. These days, more of the world is open to ASX investors than ever before. It isn’t too hard to buy shares listed on the US markets. Or indeed on the stock markets of Japan, the United Kingdom, Europe or Hong Kong.
We’re all told to diversify. As such, it becomes easy to think that having British, Japanese, American and Chinese businesses in our portfolio, alongside our ASX shares, can only be a good thing from a diversification standpoint.
But here’s the thing. The whole point of building your own portfolio of ASX shares is to try and achieve a rate of return that is superior to that of an index fund. Otherwise, we’d all just be buying exchange-traded funds (ETFs) and calling it a day.
The perils of buying too many ASX shares
In order to consistently beat the market, you need to research your companies thoroughly and understand what share price is needed to achieve a market-beating return. Doing this on 15 individual companies is one thing.
But buying and keeping abreast of 40 or 50 different individual ASX shares is probably a task that is too overwhelming for most investors. It’s hard to make a logical case to put money in your 50th best idea, after all.
As such, we can conclude that the probable consequence of having too many shares is achieving a rate of return that is broadly in line with an index fund at best. And one that undershoots the broader market at worst.
So if you’re a fan of big diversification, a better choice might be to make a broad-based US markets ETF one of the 15-25 shares of your portfolio. That way, you can have access to the entire US market without worrying about too many shares.
You could even use an ultra-diversified ETF like the Vanguard MSCI Index International Shares ETF (ASX: VGS). This fund has around 1,500 individual shares within it, hailing from more than 20 advanced economies around the world.
Of course, every investor is different in temperament and goals. But you can certainly have too much of a good thing when it comes to buying ASX shares and diversification.
