The Hidden Risks of Over-Diversification: A Discussion with Faisal Al Hashim of Maxiam Capital

Diversification is widely regarded as one of the pillars of a sound investment strategy, designed to spread risk across multiple assets and safeguard against market volatility. However, as investors seek to reduce risk by holding a wide array of Exchange-Traded Funds (ETFs) and Mutual Funds, many unknowingly fall into the trap of over-diversification, which can dilute returns and increase portfolio complexity.

In a recent conversation with Faisal Al Hashim, Managing Director of Maxiam Capital, we explored the growing trend of over-diversification and the unexpected risks it poses. “Diversification is important, but when taken too far, it can become a liability,” Faisal explained. “We often see investors holding multiple funds or working with several advisors, only to find that they’re essentially invested in the same assets multiple times, which creates unnecessary overlap.”

What is Over-Diversification?

While diversification aims to spread investments across different sectors, asset classes, and geographies, over-diversification occurs when investors go beyond what is necessary. Owning too many different funds or securities can water down the potential benefits of a focused strategy, often leading to complexity without added value.

“Many clients come to us with portfolios filled with multiple ETFs and Mutual Funds, thinking they’re smartly spreading out risk,” Faisal noted. “However, what they don’t realize is that by owning several funds—each containing hundreds or thousands of securities—they’re often diluting their returns and making it harder to manage their investments effectively.”

For instance, a single equity mutual fund or ETF might hold over 100 stocks. If an investor owns several such funds, they could easily end up with thousands of individual securities, often with significant overlap. This excessive diversification reduces the investor’s ability to capture meaningful returns from any one asset and complicates the overall portfolio structure.

The Risks of Overlapping Investments

One of the primary risks associated with over-diversification is overlapping investments. When investors hold multiple funds that track similar indices or sectors, they may inadvertently have large positions in the same securities. This leads to over-concentration, which can negate the benefits of diversification intended to reduce risk.

“Clients are often shocked when we conduct our complimentary financial reviews and show them how much overlap exists in their portfolios,” Faisal shared. “Many think that working with multiple advisors or holding numerous similar funds is a smart move, but this often leads to over-concentration rather than true diversification.”

Over-concentration increases risk exposure, despite the illusion of safety. It can also derail an investor’s carefully planned risk-reward balance, potentially resulting in suboptimal performance. Over-diversification often leaves investors without a clear understanding of what they truly own, complicating their ability to make informed decisions.

The Costs of Over-Diversification

Beyond the risks of overlapping investments, over-diversification can also result in higher costs. Holding multiple funds or working with several financial advisors leads to increased management fees, advisor fees, and transaction costs. These additional expenses can quietly erode an investor’s returns over time, making it more difficult to achieve long-term financial goals.

“Many investors aren’t aware of the hidden costs tied to owning too many funds or working with multiple advisors,” Faisal pointed out. “When you’re paying higher fees but not seeing the returns you expect due to over-diversification, it can be frustrating and counterproductive.”

At Maxiam Capital, transparency is a key focus. During their financial reviews, the firm helps clients identify unnecessary fees and streamline their investments to reduce costs without sacrificing performance. “By simplifying portfolios, we help clients keep more of what they earn,” Faisal added.

Why Balance is Key

The key to avoiding over-diversification is striking the right balance. True diversification involves spreading investments across a mix of asset classes and sectors in a way that aligns with an investor’s goals, risk tolerance, and time horizon. However, this also requires avoiding unnecessary complexity and ensuring that each investment plays a meaningful role in the overall strategy.

“At Maxiam Capital, we take a comprehensive approach to portfolio construction,” Faisal explained. “Our goal is to build balanced, diversified portfolios that minimize risk while maximizing returns—without the clutter of over-diversification.”

Maxiam Capital works closely with clients to help them understand the underlying components of their investments, ensuring they have a clear picture of what they own and why. By eliminating overlapping holdings and reducing costs, the firm ensures that every investment aligns with the client’s financial objectives.

The Importance of a Focused Strategy

Successful investing requires a focused strategy. Over-diversification can dilute the effectiveness of an investment plan, resulting in unnecessary complexity and additional costs. By reviewing each client’s portfolio and eliminating redundancies, Maxiam Capital helps investors achieve clarity and efficiency in their investments.

“When clients work with us, they gain confidence in their portfolios,” Faisal shared. “We ensure that every investment serves a purpose—whether it’s for growth, income, or capital preservation—without the noise and confusion of excessive holdings.”

Conclusion: A Clearer Path to Financial Goals

Over-diversification is a common issue among investors, particularly those who manage multiple funds or work with multiple advisors. While diversification is essential for managing risk, it’s important to avoid holding too many overlapping investments, which can increase complexity, reduce returns, and add unnecessary fees.

Through Maxiam Capital’s complimentary financial reviews, clients gain a clearer understanding of their portfolios and the risks of over-diversification. By focusing on balance, simplicity, and strategic investment choices, Maxiam Capital ensures that each portfolio is optimized for long-term growth.

“Our clients are often surprised by how much they’re holding and how much they’re paying,” Faisal concluded. “But once we streamline their portfolios, they see the benefits right away—more focus, lower costs, and a clearer path toward achieving their financial goals.”

With Maxiam Capital’s expertise, investors can feel confident that their portfolios are built for sustainable growth—without the pitfalls of over-diversification.

Disclosure:

The views expressed in this article are those of the author and do not necessarily reflect the views or opinions of Maxiam Capital. This content is for informational purposes only and does not constitute financial, investment, or professional advice. All investments carry risks, and past performance is not indicative of future results. Maxiam Capital does not endorse or guarantee any third-party content’s accuracy, completeness, or reliability. The reader is solely responsible for any actions taken based on the information in this article and is strongly advised to seek financial advice from a qualified professional before making any investment decisions.