Is Your Portfolio as Diversified as You Think it Is?


Diversification should be an important part of everyone’s strategy when it comes to investing, but it can be easy to either over or under diversify. Many people think they’re diversified, but when you dig deeper on any given portfolio, we find that’s often not the case.  

You want to choose a variety of assets – stocks, bonds, cash and others – but you also want to choose ones whose returns haven’t all historically moved in the same direction, and, ideally, assets whose returns typically move in opposite directions to help your portfolio hold up better in down markets.  

Another important aspect of building a well-diversified portfolio is that you try to stay diversified within each type of investment. It’s also smart to diversify across stock holdings by market capitalization (including small, medium, and large caps), sector, and geography. 

Something else to consider is stock overlap or duplication between funds. Many people select what they think are very different funds, when in fact they may not be. For example, if you hold several funds, they may be diversified on their own. But if you were dig a bit deeper on them of these, you might notice that many of the top holdings of the different funds are the same, meaning that you’re not nearly as diversified as you had though. 

Another key issue to maintain diversification is rebalancing.  Rebalancing is the mechanism to replenish diversification. Without rebalancing, a portfolio tends to become more concentrated in the assets that have performed well. The benefits of the original plan start to erode. With the relative strength in equities over bonds, US equities over international stocks, and growth stocks over value stocks in recent years it’s entirely possible portfolios have become less diversified and need to be adjusted.      

When you do rebalance, it’s important to take advantage of tactical tilts based on market and macroeconomic conditions. This is where your financial professional should play an important role.  

So, as you can see, diversification may not be as simple as it sounds, particularly as your portfolio grows.  

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Case studies are intended to illustrate the types of financial issues faced by actual clients. They should not be construed as a testimonial for or endorsement of Lineweaver Wealth Advisors. They do not represent the experience of any advisory client. Each client’s situation is different, and their goals may not always be achieved. Lineweaver Wealth Advisors, LLC, is not engaged in the practice of law or accounting. Tax information provided is general in nature and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. Tax rules and regulations are subject to change at any time.
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