Meaning and concentration
Diversification distributes investments across different assets and sources of risk. It can reduce dependence on a single issuer, industry or other narrow factor. The number of positions is not the only consideration: their economic relationship matters because similar instruments may react to the same event at the same time.
An illustrative portfolio
If a portfolio consists of shares in several companies from one industry, a sharp fall in demand for that industry’s products may affect most positions. Buying one more similar share does not necessarily reduce concentration materially. The common factors that actually link the assets must be identified.
What diversification cannot do
Diversification does not guarantee a profit and does not eliminate broad market risk. A large number of funds can also conceal repeated exposure to the same holdings inside them. For review, examine the look-through portfolio, currencies, maturities, counterparties and instrument availability. Allocation should fit the investor’s objectives and constraints rather than merely create a long list of names.