4-2 The Three Axes of Diversification
A page starting from the rough guide of around ten holdings, then checking diversification across product type, sector, and country/region
When thinking about diversification, the first thing most people worry about is roughly how many holdings should I have. With individual shares, splitting across around ten holdings rather than holding just one already dilutes the effect of any single company considerably. But that does not mean just buy any ten. What matters is using holding count as the entry point and then checking the contents across three axes: product type, sector, and country/region.
- With individual shares, around ten holdings already dilutes the effect of any single company considerably.
- But simply increasing the number of holdings does not mean you are diversified.
- Check diversification across three axes: product type, sector, and country/region.
- With funds too, keep the convenience of holding many names in one product separate from overlap in the contents.
1. Around ten holdings already dilutes single-company effects
Hold just one individual share and that company's movement dominates your whole portfolio, because a downgrade to guidance, a scandal, or a weak flagship product feeds straight through to your assets.
As you add holdings from there, how much any one company sways you thins out and the diversification effect appears. As one rough guide, around ten holdings already dilutes single-company effects considerably. Adding the first few holdings has a large effect, while going on to twenty or thirty lowers risk progressively more gently.
That said, ten is not an absolute answer. How many holdings you can comfortably run changes with the amount of money, how many you can manage, and how closely you can follow individual companies. And simply adding holdings has limited effect if they tilt towards similar products, the same sector, or the same country.
2. Combine products with different characters across three axes
When thinking about diversification, look at what is spread rather than how many you hold. The three to check are product type, sector, and country/region.
| Axis | What to look at | A common way it tilts |
|---|---|---|
| Product type | The mix of equities, bonds, REITs, deposits, and so on | Tilting entirely into equities, so movement becomes large |
| Sector | Weights across information technology, healthcare, financials, consumer staples, and so on | Concentrating in a popular sector, so holdings move together on the same news |
| Country/region | Weights across the US, Japan, developed markets, emerging markets, and so on | Leaning too far into one country, so that market's conditions dominate |
Hold ten shares, for instance, but if the contents are all close to US tech, diversification works far less than it appears. Conversely, even without many holdings, combining bonds and deposits alongside equities and splitting across sectors and countries makes any tilt easy to see.
The point here is combining products with different characters. Holding ten shares helps dilute single-company effects. But only when you also check, across the whole portfolio, whether it tilts entirely into equities, leans on one sector, or concentrates in one country does the quality of your diversification become visible.
3. The same thinking applies to funds
With a fund, one product holds many names, so it looks easier to diversify than with individual shares. Buying a single fund tracking the S&P 500, for example, invests across roughly 500 representative US companies at once — far more manageable than assembling 500 individual holdings yourself.
But holding many names in one product is not the same as the whole portfolio being adequately diversified. An S&P 500 fund invests in roughly 500 companies, yet it is fundamentally a product centred on US equities, and US large caps in particular. If you hold both a global equity fund and an S&P 500 fund, the names differ but US large caps overlap heavily. This overlap is also covered in 3-5 What to check when choosing a fund and in the column Does holding both global equities and the S&P 500 give you diversification?.
With funds, the order to look is the same. Rather than how many do I hold, check the contents across product type, sector, and country/region. When adding funds, separate whether you are adding diversification or simply thickening more of the same character.
So with individual shares and with funds alike, diversification is judged by contents rather than count. Next, once your candidate products are in view, we think about the weights to hold each at.