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				<title>Diversification should not be driven by FOMO!</title>
				<link>https://freefincal.com/diversification-should-not-be-driven-by-fomo/</link>
				<pubDate>Wed, 29 Apr 2026 00:30:24 +0000</pubDate>
								<dc:creator><![CDATA[M. Pattabiraman]]></dc:creator>				<guid isPermaLink="false">https://freefincal.com/?p=351318</guid>
					<description><![CDATA[It is quite easy to appreciate the benefits of diversification. The proverb, &#8220;Don&#8217;t put all...]]></description>

				<content:encoded><![CDATA[<figure><img src="https://freefincal.com/wp-content/uploads/2028/03/Diversification-should-not-be-driven-by-FOMO.webp" class="type:primaryImage" /></figure><p>It is quite easy to appreciate the benefits of diversification. The proverb, <em>&#8220;Don&#8217;t put all your eggs in one basket&#8221; </em>(earliest use: Miguel de Cervantes&#8217; 1605 novel Don Quixote) appeals to us immediately as a caution against taking on too much risk.  However, there are issues with its practical application to an investment portfolio.</p>
<p>First, we diversify across asset classes. Typically, equity and fixed income; some also include commodities like gold and silver, maybe even real estate in the form of REITs, InVits, etc. (not a recommendation, just a listing).</p>
<p>But how do we know they are &#8220;different&#8221; assets? They have different kinds of risks. We differentiate assets based on risk, not reward.</p>
<p>Next, we can diversify within an asset class. For example</p>
<ul>
<li>Equity: Large, mid and small cap, geographic diversification, sectoral or thematic diversification</li>
<li>Fixed income: bonds with different types of maturities, issuers, etc.</li>
</ul>
<p>If your portfolio is well diversified, then it will always have some underperformers! Very few investors appreciate this. This is because asset classes and asset types perform and underperform relative to one another in cycles.</p>
<p>When we rebalance or reset the asset allocation in a well-diversified portfolio, we are shifting some gains from an outperformer to an underperformer! Another idea very few understand. We do this to reduce the volatility in the overall portfolio.</p>
<p>The problem is that investors expect their portfolios to have only outperformers. And the reason most of them wish to &#8220;diversify&#8221; is that they are unhappy with their existing portfolio mix, see an outperformer and add it, triggered by FOMO.</p>
<p>For example, they see gold shine and want more of that. They see the Indian stock market down and want &#8220;international exposure&#8221; because they US stocks do better and so on. Such an approach will only result in clutter.</p>
<p>We must appreciate that maintenance duties increase with diversification. Asset classes and asset types will stay from the original asset allocation (assuming there was some planning involved in the first place). If we do not reset this periodically (when there is a deviation of more than 5%), we will let the portfolio rise and fall with market forces and rely on luck. We need to respect our money better.</p>
<p>Diversification is essential, but it should be done for the right reasons, with the right expectations and the right periodic maintenance.</p>
<p>The post <a href="https://freefincal.com/diversification-should-not-be-driven-by-fomo/">Diversification should not be driven by FOMO!</a> appeared first on <a href="https://freefincal.com">freefincal</a>.</p>
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