SpawnLearnStock Market · 3 MIN READ
Diversification: why more holdings can mean less concentration
Learn what diversification can and cannot do, why overlapping funds matter, and test your understanding with three questions.
By SpawnLearn · Updated
Spread the sources of risk
Diversification means spreading investments across holdings with different sources of risk. Owning one business leaves you highly exposed to that business's problems. Holding a range of businesses can reduce the effect of one company's failure on the whole portfolio.
Count exposures, not just holdings
Ten stocks in the same industry can still react to the same shock. Two funds may own many of the same companies. Look through fund names to the underlying holdings, industries, and assets. A longer list does not necessarily give you a broader mix.
Risk does not disappear
Diversification cannot guarantee a profit or prevent losses when markets fall together. The allocation between assets also matters, as do your time horizon and ability to tolerate losses. Different holdings may become more closely related during stressful markets, so historical differences are not a promise.
Keep this in mind: Ask what could hurt your holdings at the same time.
Go a little deeper
Three questions. See what sticks.
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