Diversification is arguably the most crucial concept in finance. Ray Dalio, the founder of hedge fund giant Bridgewater Associates, famously calls it "the holy grail of investing". Harry Markowitz, the pioneer behind Modern Portfolio Theory, celebrates diversification as "the only free lunch in finance" -- the only way for investors to reduce portfolio risk without sacrificing return.

While the importance of diversification is clear, its drawbacks are far less palpable -- and easy to miss. Is it truly a free lunch? Is it possible to have too much of a good thing -- and be over-diversified? Do you really need to own the entire market? Let's find out.

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Source Fool.com