Are Your Investments as Diversified as You Think?

You’ve likely come across a chart like this at some point in your financial planning journey:

What Diversification Is Meant to Do

Advisers often refer to this chart as an asset allocation “quilt.” It illus­trates the value of owning a diver­sified portfolio (the white boxes) rather than concen­trating too heavily in a single investment or trying to time the stock market. Since 2006, a diver­sified 60/40 portfolio has produced a 9.68% annualized return. In contrast, the other colors move sharply up and down, highlighting how difficult it is to predict which asset class will outperform in any given year. This is why diver­si­fi­cation matters: by owning a mix of invest­ments at the same time, investors can pursue reasonable long-term returns while reducing the impact of extreme market swings. 

When portfolios are thought­fully diver­sified, returns tend to land closer to the middle over time. As you scan the chart from left to right, notice how the white boxes appear with relative consis­tency. That steadier pattern reflects what proper diver­si­fi­cation is designed to provide—more balance and a smoother overall experience.

The Hidden Problem With “Being Diversified”

Many people think of diver­si­fi­cation as avoiding putting all their eggs in one basket, and that’s a helpful starting point. In practice, however, diver­si­fi­cation is often more nuanced. It generally involves gaining exposure to a broad range of companies across different segments of the market.

The challenge is that, in an effort to diversify, investors may unknow­ingly build portfolios that are more complex or less efficient than they appear.

When Multiple Funds Own the Same Companies

Here’s what I mean: Suppose you want to include large cap U.S. stocks in your portfolio.  You know it wouldn’t be prudent to invest every­thing in a single company, so you select several mutual funds or ETFs that represent this asset class.  At first glance, your portfolio appears well diver­sified because it holds a variety of invest­ments, you’re not putting all your eggs in one basket, right?

Let’s take a closer look by “x‑raying” a hypothetical portfolio built with five popular large-cap funds.

Why Portfolio Overlap Can Create Inefficiency               

Do you see what’s happening here? In an effort to diversify, you may end up owning companies like NVIDIA, Apple, Microsoft, Amazon, and Alphabet multiple times across different funds. These are just a few examples; this type of overlap can be present throughout a portfolio. What initially appears to be diver­si­fi­cation may instead reflect unnec­essary duplication.

Because each mutual fund or ETF carries its own expense ratio, holding multiple funds with similar under­lying invest­ments can increase costs without neces­sarily improving diver­si­fi­cation. Over time, it’s possible to accumulate many funds that hold many of the same companies, adding complexity without a clear benefit.

Diversification Should Focus on Asset Classes    

So, what’s to be done? In practice, diver­si­fi­cation is often more effective when it focuses on broad asset classes rather than the number of funds held. This means gaining exposure to different market segments and a wide range of under­lying companies, rather than relying on multiple funds that may overlap in their holdings.

Investors may benefit from holding a mix of asset classes—such as large‑, mid‑, and small-cap U.S. stocks, inter­na­tional equities, and fixed income—while maintaining a clear under­standing of how each investment contributes to the overall portfolio.

Building a Portfolio With More Clarity

It’s possible to build a well-structured portfolio using a relatively small number of thought­fully selected funds. In many cases, a more stream­lined approach can improve trans­parency and make it easier to under­stand how your invest­ments are working together.

If discus­sions like this raise questions or feel complex, you’re not alone. Our team is here to help you bring clarity to your portfolio and under­stand how each piece fits within your broader financial plan. If you’d like additional perspective or a clearer view of your current invest­ments, we welcome the oppor­tunity to connect.