Diversification: count exposures, not tickers

Look inside each holding

Start with the underlying companies, sectors, countries, currencies and asset types. An index fund, a technology fund and a handful of large technology shares may all rely on the same businesses. Different labels do not make the exposures independent.

A useful first pass is to list the largest holdings and their portfolio weights. If a company is 5% of a fund that represents 40% of your portfolio, that fund contributes 2% of your portfolio to the company before counting any other holdings. Use factsheets from comparable dates.

Diversification has limits

Spreading exposure can reduce the effect of a single holding failing. It does not remove a broad market decline. Correlations are estimates from a selected period, and assets that behaved differently in one environment can fall together in another.

Think through shared drivers as well as past price relationships: interest rates, refinancing needs, consumer demand and currency exposure. A portfolio can be diversified by company count while still depending heavily on one of those drivers.

Rebalancing is a rule, not a forecast

Rebalancing brings a portfolio back towards its intended allocation after price changes or contributions alter it. For example, a hypothetical 60/40 mix may drift to 72/28. Restoring the original mix is a decision about exposure; it does not establish that the recent winner is about to fall.

A written review rule might use calendar dates or a specified amount of drift. Both involve trade-offs. Transaction costs, taxes, minimum sizes and dealing spreads can affect implementation. Directing new contributions towards an underweight exposure is another possibility to compare.

Review the plan as well as the weights

A change in a goal, time horizon or need for cash is different from ordinary market drift. Reconsidering the intended mix and executing a pre-existing rebalancing rule are separate decisions. Record which one you are making and why.

• Check overlapping holdings and currency exposure.
• Include cash needs and investments held elsewhere.
• Record costs and the rule used, rather than selecting a mix from recent returns.