How to Prevent Portfolio Overlaps

There are times wherein your active trading will result to portfolio overlapping. Because you are too busy with your other job or have been investing in so many ways, you did not check if you are actually overlapping your portfolio.

Portfolio overlaps usually happens when you invest in mutual funds and those funds have been invested in the same shares.

When this happens, the risk in mutual funds and other investment plans is not evenly distributed because your portfolio is investing in the same companies.

Although the company’s success would also mean your success, a company’s downturn will mean increased loss in your portfolio.

Portfolio overlapping will prevent a balanced portfolio that will ensure stability even with harsh economic conditions.

Some would say that it is ok to overlap as long as you are aware of the situation of the stock market. But you cannot just sit around monitoring the price per share just to prevent this from happening.

The security that you will enjoy with a diverse portfolio is better than the little earnings that you will get when investing in the same company.

Common Scenario Leading to Portfolio Overlapping

There are situations that often tell that your portfolio is overlapping. When this happens, it is up to you if you would get out of the situation or stay still and face the consequences of a non-diverse portfolio.

• Same Manager Approach – The common scenario where you will find overlapping portfolios is when you are working with the same funding manager. The funding manager is aware of your need of diversification but he/she will only work with the shares they are confident in dealing with.

If you work with the funding manager with more than two mutual funds, there is a great chance you are dealing with the same shares.

• Boutique Funding – Boutique funds refer to the approach of some mutual funding companies that specialize on particular type of shares.

This type of mutual fund looks very good in the sense that you are actually diversifying on the specialization. But that does not mean you are diversifying the risk in your portfolio.

You could be getting some shares from divers industries but you are still placing your portfolio in the same risk.

• Companies with Larger Capital – There are also mutual funding offers that are based on companies with large capitals. That may look good since they offer the strength of a large company that could handle almost any economic challenges.

But if you are offered with two mutual finds that are composed of large companies, walk away from one of them. The large players in the stock market only compromise 6%.

There is a great possibility that you have the same shares if you have two or more mutual funds.

Preventing Portfolio Overlapping

The basic way of preventing this type of inconvenience in your portfolio is to research a little bit more on the offered mutual fund. It will take some time but you are allowed to have this information from the funding manager. You could point that out to your funding manager so that they could rectify it.

Another way of preventing this type of inconvenience is to use online tools to develop your portfolio.

There are tools online that you can use wherein it will tell you if you are actually overlapping your portfolio based on the mutual funds you are taking.

They are usually subscription based websites which will cost you but will provide you considerable comfort.

Portfolio overlapping may turn out to be dangerous if you take for granted the wisdom of a diversified portfolio.

Prevent this from happening so that you can always have something no matter what happens in the economy.