Diversification is not the number of funds you own

There is a short answer about diversification and a useful one, and they are not the same. What follows is the useful one.

Counting funds measures nothing

Holding several funds that track overlapping indices produces one exposure at multiple fee layers. The relevant question is what the combined holdings actually own, not how many products are involved. Looking through to underlying holdings usually reveals substantial duplication.

Real diversification is across drivers

Different geographies, company sizes, sectors and asset classes respond differently to the same conditions. A global equity fund is well diversified across companies and remains a single asset class. Adding bonds changes the risk profile far more than adding a fourth equity fund does.

Home bias is the usual concentration

Investors across almost every country hold far more of their domestic market than its share of global markets would suggest. That concentrates the portfolio in the same economy that pays your salary and, often, owns your house.

Some home bias is defensible for currency reasons; a large amount is a concentration decision worth making deliberately.

Correlation moves in a crisis

Assets that appear uncorrelated in normal conditions frequently fall together in a severe sell-off. Diversification reduces risk over ordinary periods and offers less protection in the worst weeks. This is an argument for holding some genuinely defensive assets rather than assuming spread equals safety.

Simplicity usually wins

A single global tracker plus a bond allocation is diversified by any reasonable measure and needs almost no maintenance. Every additional holding is another thing to rebalance, monitor and eventually rationalise. Complexity is easy to add and difficult to unwind, particularly in a taxable account.

The takeaway

Look through to what you own, not at how many products you own.

Pick the one that costs you least, and let the rest wait.