THE 5-YEAR-OLD VERSION
If you put your eggs in five baskets but all five baskets sit on the same shaky table, one wobble drops all of them. Diversification means different baskets on different tables.
What diversification means
- Across companies: one bad result should not sink you.
- Across sectors: banks, IT, health care and consumer companies do not all move together.
- Across countries: India, the US and others have different cycles.
- Across asset types: shares, gold and debt behave differently in a crisis.
The overlap trap
Funds are baskets. Two baskets can hold nearly the same fruit. We measure overlap by taking each company both funds hold and counting the smaller of the two weights, then adding those up. 100% means the same basket, 0% means nothing in common.
A real example from our data
The Vanguard S&P 500 ETF and an ETF on the Nasdaq-100 share at least 42% of their money in the same companies, counting only each fund's top 20 holdings (the true figure is higher). Owning both feels like two bets, but it is closer to one big bet on American mega-cap technology.
How to check yours
- Open the overlap analyzer to compare any funds or ETFs side by side.
- Use the Portfolio X-Ray to add up your whole portfolio and see the real companies and countries underneath.
- Read why a blend of US index funds is often just five stocks.
Diversification does not remove risk. In 2008 almost everything fell together. It reduces the damage from any single mistake, which is what you can control.