Construct Portfolio In Market Volatility
Under-diversification is risky since a few slip-ups or a run-in with Bad Luck might prove to be portfolio-ending. The mutual fund sector is the opposite extreme, where it is typical to see portfolios containing hundreds of stocks (I am generalizing). There are a variety of causes behind it. An army of analysts work for mutual funds; they must be kept occupied, their opinions must be heard, and their stock recommendations must be included in the portfolio (there are a lot of internal politics in this portfolio). Since these portfolios are constructed using benchmarks, they begin to resemble Noah's Ark by include a few animals ( stocks ) from each industry. Additionally, the fund's size could make it harder for it to purchase significant stakes in fledgling businesses. This strategy comes with a number of drawbacks. First, and most importantly, it fosters apathy because it has no effect on the portfolio if a 0.5% stake doubles or is cut in half. The second issue is that...