Diversification That Actually Works

Lesson 2 of 5 in Portfolio Construction & Risk · 9 min read

Diversification reduces the impact of any single investment going wrong.

The over-diversification trap

Owning ten large-cap funds rarely diversifies; it often duplicates the same stocks. Check portfolio overlap between funds.

Dimensions of diversification

• Asset class: equity, debt, gold
• Market cap: large, mid, small
• Style: growth and value
• Geography: domestic and international exposure

Correlation

Assets that do not move together provide the most diversification benefit. Gold and high-quality debt have historically behaved differently from equity during stress, though past patterns can change.

A simple core-satellite approach

A low-cost diversified core (for example index or flexi-cap funds) with smaller satellite positions keeps portfolios manageable.

Key takeaways

• More funds is not more diversification
• Check overlap between holdings
• Diversify across assets, styles and geographies

• Previous: Asset Allocation Fundamentals
• Next: Rebalancing & Behavioural Discipline