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As a financial planner, we’ve seen first hand how investing has evolved—from paper statements and phone-based trading to algorithmic platforms and robo-advisors.
Yet, amidst all this innovation, one truth remains: the core principles of diversification haven’t changed.
In fact, in an age of overwhelming choice, these timeless concepts are more critical than ever.
In this piece, I invite you to step back with me—to revisit the real purpose of diversification and why, as professionals, we often guide clients toward fewer, better-chosen investments.
The goal? A portfolio that delivers peace of mind and consistent performance.
TABLE OF CONTENT:
- A Glimpse into the Past
- Timeless Principles in a Digital Age
- Illusions of Safety
- The Core Purpose of Diversification
- The Math Behind the Method
- Simplicity Over Sheer Numbers
- A Simple, Balanced Portfolio
- Striking the Right Balance
- Conclusion
1. A Glimpse into the Past
Recently, I came across a clipping from a 1996 ABA Journal article titled “Spreading the Wealth.”
It reminded me how even decades ago, financial professionals clearly understood the fundamentals of diversification—long before modern tools and apps reshaped our industry.
It posed a valuable question: how much of today’s investing complexity is truly necessary?
2. Timeless Principles in a Digital Age
Despite the explosion of data, apps, and AI tools, the core mission of diversification remains the same—reduce risk and improve outcomes over the long term.
Jon Newberry’s article broke down the math in plain terms. And it made me reflect on conversations I have with clients every day: Are we still honoring those foundational principles, or have we lost sight of them in the chase for novelty?
“In investing, what is comfortable is rarely profitable.” — Robert Arnott
3. Illusions of Safety
As a planner, I often hear clients say, “I’m well-diversified—I own 25 different mutual funds!” But when we dig into the details, a pattern often emerges: many of these funds hold similar underlying assets, and a few of them may dominate in terms of allocation.
The rest? Too small to make a meaningful impact, yet large enough to add complexity, duplication, and paperwork.
This isn’t true diversification—it’s the illusion of safety. Owning too many funds often leads to overlap and return dilution, not better risk management.
This is not true diversification—it’s the illusion of safety.
“Wide diversification is only required when investors do not understand what they are doing.” — Warren Buffett
4. The Core Purpose of Diversification
We must always come back to the “why.” Diversification isn’t about spreading money thin—it’s about protecting capital.
The late Philip Fisher warned against placing “too many eggs in too many baskets,” especially if some baskets are weak.
From a planner’s viewpoint, smart diversification means intentionally selecting holdings that reduce correlated risk, not just adding more names for the sake of variety.
5. The Math Behind the Method
Newberry’s article shared an elegant illustration of how effective diversification reduces risk:
- Holding one security = 33% chance of a total loss
- Holding two uncorrelated assets = risk drops dramatically
- Holding five = the chance of complete loss falls to less than 0.5%
The message for investors is clear: diversification works—but only when it’s intentional and based on true differences in underlying risk and behavior.
Simply adding more assets doesn’t help if they all move in the same direction. Purposeful diversification means selecting investments that truly complement each other.
6. Simplicity Over Sheer Numbers
A common misconception I address is that more holdings always mean lower risk. But diversification follows the law of diminishing returns.
The jump from one to five investments is powerful. But the leap from 25 to 50? It adds complexity without improving your risk-reward ratio in any meaningful way.
As planners, our role is to construct portfolios that spread risk effectively across asset classes, geographies, and styles, not simply inflate the number of positions.
7. A Simple, Balanced Portfolio
Most investors don’t need dozens of individual stocks. A thoughtfully designed portfolio of just four to six mutual funds or ETFs can be incredibly effective:
- A large-cap fund
- A mid/small-cap fund
- An international equity fund
- A high-quality debt fund
Each fund includes dozens—sometimes hundreds—of professionally managed securities, delivering instant diversification without the stress of managing each individual position.
“Know what you own, and know why you own it.” — Peter Lynch
8. Striking the Right Balance
Too many holdings dilute your attention and can lead to emotional investing.
As a financial planner, I often counsel clients to stick with five to ten well-researched investments—enough to protect against risk, but few enough to maintain clarity and control.
Remember: diversification is not a substitute for due diligence. A large number of poor or overlapping investments won’t outperform a smaller portfolio built with purpose and quality in mind.
9. Conclusion: Invest with Intention, Not Excess
“Simplicity is the ultimate sophistication.” — Leonardo da Vinci
At the end of the day, good investing isn’t about how many assets you hold— it’s about how well they work together.
As a financial planner, I encourage clients to resist the temptation to equate action with strategy. The best portfolios aren’t the most crowded—they’re the most coherent.
If your portfolio feels bloated or hard to manage, it may be time to revisit the fundamentals. Diversification is about protection, not overextension.
Let’s prioritize quality over quantity, and invest with the clarity, balance, and discipline that build lasting wealth.
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