We have all heard financial investors preach on the importance of having a diversified portfolio. Not only does this maximize our profit, but it also protects us from risk by having more than one type of stock. Diversification is important to our success in the investment world. However, how much diversification is too much? How many stocks do you need to own before you are adequately diversified and is there a magical number? There comes a point where your portfolio can become over-diversified. It is important to find and maintain a healthy balance of diversity.

What is Diversification and Why is It Important?

Diversification occurs when investors intentionally own stocks in different companies, industries and geographic locations. They are intentional about this in order to reduce their risks within the market. If one industry or location struggles, there is still balance and growth overall in their stocks and investments. They are protected.

This is important because the investor will have a healthier and more profitable experience. When one stock struggles, the others may thrive. This will help protect them from major drops in the market.

If you have ever heard the saying, “Don’t put all your eggs in one basket,” then you will have a better understanding of this theory.

The investor is choosing to have more than one basket, so that if one gets dropped, he doesn’t lose all of his profits. He is choosing not to depend on one stock or company for all of his success.

However, sometimes too much diversification can hurt you rather than help.

So…

What is the Magic Number?

According to the Modern Portfolio Theory, or MPT, your portfolio achieves maximum diversity when your purchase your 20^th stock.  The MPT found, after strenuous research, that you can only eliminate your risk so much before it begins to plateau. This plateau typically occurs after your stocks add up to the sum of twenty.

However, remember that the number 20 is not magical on its own. Owning twenty stocks will not automatically give your optimal diversity and maximum profit alone. Instead, your 20 stocks must be diverse and well-chosen. They should come from different locations, industries and sectors. Twenty stocks from the same company will not give you the diversity that you are aiming for.

What About Mutual Funds?

Although mutual funds can be safe and profitable, they will not necessarily give you optimal diversification. Although the fund may invest in many different companies, many funds are still sector specific. Although you may be diversified in a particular sector, you do not have diversification across the board when it comes to different industries. If you are looking for something more diverse across the board, look into owning a balanced fund. They own stocks across the entire market.

When owning a mutual fund, it also can be a dangerous way to fall into over-diversification. Many large mutual funds own hundreds of different stocks, and therefore, so do you. Be sure to research what your mutual fund owns and keep tabs on how diverse it is.

Diversification is vital, but only to a certain extent. Be smart and vigilant when deciding where to invest your money. Find the happy balance that you are looking for.

Emilie Burke

Emilie is a prolific blogger, and influencer inspiring millennial women to live financially, physically, and professionally fit lives. She writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. She is a politics major turned data engineer who graduated from Princeton University in 2015.  She currently lives in North Carolina with her college sweetheart Casey who is currently stationed at Fort Bragg. She enjoys eating food, cuddling with her dog, and binge watching HGTV.

Robo-advisors  are completely automated systems online that help you to invest your money. Robots, if you will. They are becoming increasingly popular with the younger generations, specifically those with less investment experience. Younger individuals getting their feet wet in the investment industry are turning to robo-advisors for all their financial advice.

You tell the robo-advisors what is important to you, and they do all the tough calculations. (Don’t worry, they’re using solid logarithms and criteria.) Many give general investment advice, and others help you plan for your retirement and reach other specific financial goals.

Although at first I was very skeptical of roboadvisors, I have tried one, Betterment, and found it to be extremely beneficial for me- a girl who initially had very little financial knowledge. They have minimal fees, and give you the flexibility that many investors need. You don’t have to be investment-savvy, and are still able to profit greatly from your investments. It is fairly safe and fool-proof.

However, due to the automation of them, roboadvisors are less unique and personalized. Every single individual is unique, with specific goals and situational differences. It is hard to explain all of that to a computer. Life is complicated; not everything is cut and dry… So, are roboadvisors better than humans who give investment advice?

That answer depends majorly on your individual situation. If the automation’s cookie-cutter approach is not ideal for you, a human interaction may be more beneficial. Humans are able to give you one on one advice, and sit down and listen to your concerns.

However, robo-advisors arguably can save you significant sums of money. Let’s discuss some specific situations, and which advisement technique would be best to use.

When to Use a Robo-Advisor:

• When you don’t need direct contact and one-on-one interaction. If you’re comfortable with the computer screen, this is a perfect fit for you.
• When you want to save money. Fees are generally much lower with roboadvisors than with human advisors.
• When traditional investment advisors have high requirements. If you cannot find a human advisor who does not require steep minimum requirements, try a robo-advisor.
• When you want to be less in control, and have someone else take care of things for you. If you are looking for a hands-off approach, here it is.

When to Use a Traditional Advisor:

• If you prefer face-to-face interactions and one on one contact, robo-advisors are not the way to go.
• If you prefer to not do everything online, including money transactions, then you need to sit down with a traditional advisor. For older generations who are not familiar with technology, robo-advisors may be much more difficult to operate.
• When you disagree with your robo-advisor, or find that it is not fully benefiting your unique financial situation, switch to a traditional advisor.
• Lastly, use a human advisor when you want to be more hands-on with your investments. You can be the one in control.

Decide which option is the best fit for you. If you cannot decide, give robo-advisors a chance. You can always go back to the traditional route. Regardless, keep investing. Your future will be brighter.

Emilie Burke

Emilie is a prolific blogger, and influencer inspiring millennial women to live financially, physically, and professionally fit lives. She writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. She is a politics major turned data engineer who graduated from Princeton University in 2015.  She currently lives in North Carolina with her college sweetheart Casey who is currently stationed at Fort Bragg. She enjoys eating food, cuddling with her dog, and binge watching HGTV.

First thing first: What is a Mutual Fund?

A mutual fund is a strategy for investing that allows you to pool your money together with others to purchase a collection of stocks, bonds, or other securities. Typically, the fund is purchasing something that might be difficult or impossible for you to purchase on your own.

The collection of holdings that the fund, or company, purchases is called its portfolio. As an investor, you own a share of the fund. However, you do not own any of the portfolio. This is different; the individual stocks do not belong to you.

Now… let’s talk about some pros and cons of mutual funds.

Pros:

1. Mutual funds are convenient: You are doing a lot less of the research and work. Others do the “thinking,” and you are there to make money.
2. Mutual funds are diverse: By coming together with other investors, you are able to hold an assortment of holdings that you would be unable to purchase on your own. You are no longer limited by your own finances, and your personal opportunities soar.

3. The funds are professionally managed: Typically, there are a couple of professional managers and also a team of researchers leading the fund. People much more qualified and experienced are calling the shots.

4. They are fool-proof: By joining a mutual fund, you have the opportunity to invest any amount of money with very little experience or investing history. You don’t have to continually decide which stocks will be a good investment. After joining, you are able to sit back and relax.

Cons:

1. Mutual funds charge fees: Mutual funds are expensive to run, and therefore investors are often hit with high fees. There are often annual rates and sales commissions included in the funds.

2. Share prices are only calculated once a day: Unlike single stocks, you cannot check price changes of a mutual fund throughout the day. The price completely depends on the fund’s net asset value (NAV), which is determined by all the different holdings within the fund. This is only calculated once each day.

3. Shareholders are distributed Capital Gains: By law, mutual funds must distribute capital gains to investors. No matter how long you have been a part of the fund, the distributions are still taxed at the long-term rate. With single stocks, taxes on capital gains do not have to be paid until after you sell the stock and thus make profit. In mutual funds, you also have to pay taxes every single year on the fund’s capital gains.

4. Phantom Gains: Bummer alert- this is a pretty big con. In a mutual fund, you can actually lose money on an investment, but still owe taxes. Talk about back-tracking… This is common when mutual funds are doing poorly, and investors decide to sell. The fund may in return have to sell profitable investments in order to raise money to pay off the investors leaving. This creates capital gains, which are then distributed to all the investors.

Emilie Burke

Emilie is a prolific blogger, and influencer inspiring millennial women to live financially, physically, and professionally fit lives. She writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. She is a politics major turned data engineer who graduated from Princeton University in 2015.  She currently lives in North Carolina with her college sweetheart Casey who is currently stationed at Fort Bragg. She enjoys eating food, cuddling with her dog, and binge watching HGTV.