Diversification reduces dependence on any single investment, although it cannot eliminate market risk.
By company
Concentration can increase the impact of one company-specific failure.
By sector
Different sectors respond differently to cycles, rates and commodity prices.
Quality of diversification
Owning many stocks with the same economic driver may provide less diversification than the number of holdings suggests.
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Diversification is about risk sources
Owning many securities does not automatically create diversification. Ten companies exposed to the same industry cycle can behave like one risk.
Think in exposures
Map sector, geography, currency, market-cap, factor, customer, commodity and business-model exposures. Concentration can hide outside the number of holdings.
Correlation changes
Assets that appear independent in normal markets can become more correlated during stress. Diversification should therefore be designed around different economic drivers.
Concentration vs diversification
More holdings can reduce company-specific risk but can also dilute research attention. The appropriate balance depends on the investor's objectives, risk capacity and ability to monitor positions.
Portfolio checklist
- ☐ Holdings mapped by risk source
- ☐ Sector concentration checked
- ☐ Single-position risk checked
- ☐ Geographic/currency exposure checked
- ☐ Portfolio thesis remains understandable