In today’s Flashback Friday edition, let’s play devil’s advocate for a moment or two. While financial advisors strongly support diversification, there are some instances this technique is not as effective as it seems. The following are some challenges that arise when diversifying your holdings.

Diversification is expensive. Some investors tend to invest heavily in blue chip stocks, which are more costly than small and mid cap stocks. However, many advisors warn against aggressive diversification. Hedge funds, mutual funds, and the like purchase the blue chips. Hence, it is not sensible to double up on such investments especially stocks that exhibit sluggish growth. If you want a well-diversified portfolio, it would cost you at least $10,000 just to invest in several stock sectors. For instance, you place $1,000 for each industry, it would only give you minimal exposure to all the biggest sectors in the market.

Diversification spells doom to tax bill. The greater your holdings, the more documents and/or papers you will receive, making taxation process more strenuous. An investor needs to indicate each transaction alongside any disbursements from your stocks during a certain year.

Diversification is time-consuming. In many cases, it is difficult to keep up with the pace of diversifying a portfolio. Not to mention you need to keep abreast of the latest market news, economic data, major events, conference calls, and quarterly earnings. If you are not used to working round the clock, investing may not be for you.

Diversification can affect your trading skills. At least 30 analysts trail stocks of most large cap firms. They do so by evaluating the fundamentals and researching. Entities with numerous analysts find it hard to outmatch projections, unlike small and mid cap stocks since it only need to deal with few analysts to surpass expectations.

And diversification can impact even the best ideas. Believe it or not, diversification tends to influence investment returns. If a portfolio is divided equally, you are not actually maximizing returns and minimizing losses. Why? You are allocating the same amount of money to the best and not-so-good ideas.

Point of clarification: we never said diversification is bad for your portfolio. But overdoing it may dent your holdings – big time.