There is a lot of speculation going on in the link-building community, about whether it is possible to over optimize your anchor text. This is only relevant for blackhatters doing linkbuilding for their sites, and most likely do occasionally.
Over optimization is of cause a possibility, but it is only relevant in the extreme cases. Yes your site may drop in rankings, from a result of incoming links – but it is, mostly, only relevant for very spammy sites – these are usually sites with very thin content, and with low site authority.
The Over Optimization That you Will Get Away With
Loads of sites sometimes over optimize without even knowing it, the layout and URL structure of some sites will even lead to this optimization occurring when people are linking to you them selves. There is no single external signal that search engines can safely use, and say "aha, this website is junk".
There has to be a third rule in the calculation, and even then you can't entirely avoid having sites wrongfully penalized, which i do believe dose happen – but it will also eventually solve it self, as the website keeps releasing content, and users keep linking to the site. The problem with that is, that most users do not bother to link to your site, because its just another personal blog, or whatever. If you actively had some ongoing connections with your users, then it would not be much of a problem.
People often come to the forums and blame a certain Google update for their sites recent drop in rankings, and while that may very well be the reason, it is very unlikely that it is to late to improve your pages – unless your site has been de-indexed entirely, and this only happen in very rare cases.
Maybe a competitor had targeted your site with paid links, in a way that was sure to be discovered – i do not think you have been punished for this, it is far more likely that these links gave you a ranking boost that you lost when the search engine started to ignore them.
So what can you do?
You can always attempt to solve the problem your self, which would involve manipulating the search engine with linkbuilding, and other relevant tactics. But that will often not give any lasting results. Because sooner or later you just risk that someone complains, and someone else has a manual look at what is going on – and it really could be hard to explain how some random low-traffic blog suddenly got hundreds of links, while other blogs got very few links. It is often very easy to spot link builders, and much of it could in theory be automated.
There is nothing wrong with building a few links, but overdoing it can also be harmful to your site.
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