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I went to an investment advisor today, and asked him his opinion about splitting my foreign (non NIS/Israei) investments between VTI and VEU.

He said that he thinks it's "too diversified", and recommended instead some NASDAQ or S&P 500 index.

Can you help me understand if there can be such a thing is "too diversified"? I'm not trying to beat any market, and I don't believe I have any knowledge about whether US, China, or some other market or currency will beat others.

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ripper234
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  • the phrase "over-diversification" can be a rhetoric measure (a bit like appealing to buffett-populism like here[1], easy to give a sense of "knowledge") or it can be a founded statement if its premises are sound, look for bstpierre' answer for a short intro. I would hit back with a kind email or suggest new meeting just on this issue. Things with efficient frontiers can become tricky so it is fair for your advisor to have some preparation time. Excellent question +1 [1] http://www.investopedia.com/articles/stocks/08/Buffett-style.asp –  Mar 30 '11 at 14:51

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To understand diversification, I highly recommend The Intelligent Asset Allocator. It walks through how diversification works starting with a practical example and then working through the math.

"Too diversified" doesn't really make sense based on what you're talking about. You might apply that description if you had a portfolio that was invested into a couple of dozen different asset classes and the complexity of managing it was becoming a burden. Of if you have so many asset classes that you incur extra costs that you can't recover through either higher return or reduced risk. (Beyond a handful of well-chosen asset classes, adding more diversification doesn't really buy you much extra risk reduction.)

Is this advisor fee-only or does he have a vested interest in getting you to buy something? If the latter, beware of advice given by salesmen...

If you read the book, you'll be able to ask more intelligent questions of your advisor. But in any case, you should ask him to specifically explain why he thinks adding VTI or VEU will add more variance or lower expected returns to your portfolio than QQQ or SPY. Ideally, he can show you a pair of curves like this to back up his assertion -- one for VTI+VEU and one for QQQ+SPY:

risk/return curve

bstpierre
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  • This is pretty much what I thought. Regarding 'vested interest' - we just moved our portfolio from a bank to an investment house. We will self manage the account, but we were given a complementary financial advice session. He recommended instead choosing either S&P 500 or NASDAQ ETFs/index funds. – ripper234 Mar 30 '11 at 12:30
  • Just looked up what QQQ and SPY mean, and looks like we're thinking the same thing. – ripper234 Mar 30 '11 at 12:33
  • SPY will give you more exposure to US large cap. VTI will spread your exposure across the broader market, exposing you to mid- and small-cap as well. You could (and I do) customize your exposure to each of these classes by using SPY, VBR, and IJJ (for example). I'm not familiar with the details of VEU but it sounds like that would be a similar story. – bstpierre Mar 30 '11 at 12:37