Diversification

Diversification spreads exposure across genuinely different sources of loss. Counting tickers is not enough: businesses can share a customer, commodity, currency or funding risk. Correlations describe a chosen historical interval and can change in stress. Owning several narrowly focused funds can duplicate holdings. Separate allocation across asset types from diversification inside one type, and identify what remains concentrated after the portfolio is combined.

Worked example (hypothetical)

Two equally weighted assets return +20% and −10%. Portfolio return is +5% before costs. If both fall 20%, splitting money between them still leaves a 20% loss.

Check your understanding

List the top underlying holdings of your funds together. Which issuer or factor repeats? The repeated exposure is part of the same concentration.

Sources, reviewed 5 October 2026

• Asset Allocation and Diversification