Is diversification always optimal?

Finance theory and recent literature suggest that investors should diversify their retirement savings across a number of funds. However, the Australian government encourages investors to consolidate retirement savings into just one fund. Using a number of optimization techniques, we investigate which of these two actions would result in the best outcome for investors in terms of risk and return. We find that in the majority of cases investors would be better off not diversifying their holdings; mainly because superannuation funds cannot be short sold. Consolidation therefore does appear to be the optimal strategy for the average superannuation investor.