Diversification: Can You Have Too Much of a Good Thing?

Spreading your bets widely helps keep a lid on risk and volatility, but can you go too far?

By + More

Chen says investors should concern themselves more with the number of asset classes they have as opposed to the number of funds. "For the typical investor, if you have 10 to 15 asset classes covered, that's plenty," Chen says. "Then you say, 'OK, I want to cover 10 asset classes, so how many funds do I need to achieve that goal?' I would say if you have a 10-asset-class portfolio, maybe 20 funds."

[For more investing and money advice, visit U.S. News Money, or find us on Facebook.]

If you have more funds than that, it might be worth reviewing the investment objectives of each to see if significant investment-style or asset-type overlap exists, which can cause problems like overexposure to a particular sector and concentration of risk. If you find you have multiple funds with the same objective and similar performance, shed the less compelling ones and go with the cheaper choice, says Rob Hoxton, president and CEO of Shepherdstown, W. Va-based Hoxton Financial. He also cautions investors to be mindful of "style drift"—that mutual fund you bought years ago might not be the same, style-wise, today. "Maybe a particular fund claims to be a value fund, but when you pull the covers back and really take a look, it looks more like a growth fund," Hoxton says.

Above all, make sure your investments aren't past their prime. Investors commonly fail to reevaluate their asset mix to ensure that certain funds are still relevant and working toward their financial goals. "Compare it to a hot air balloon. If you keep putting things in the basket, the balloon is going to sink," D'Arruda says. "People should get rid of one [investment] before they buy another. You need to be more of a picker and less of a collector."

Twitter: @mmhandley