Risk · Diversification
Are you diversified, or just spread out?
There's a quiet difference between being spread out and being diversified, and it catches out a lot of careful investors. Spreading out is owning many things. Diversifying is owning things that behave differently. Only the second one actually protects you.
Meet correlation, in plain English
Correlation just means 'do these tend to move together?' Two miners are highly correlated — they rise and fall as one. Shares and, say, gold are often less correlated — gold can hold up when shares fall. A portfolio of highly correlated holdings is really one big position wearing many costumes.
Why it's the thing that matters
Protection comes from holdings that don't all have a bad day at the same time. When one zigs while another zags, your overall ride gets smoother — and you're far less likely to face a week where everything drops together.
Twenty holdings that move as one aren't diversification. They're a single bet with extra paperwork.
So don't just count your holdings. Ask how many of them would fall together on a bad day. That number — not the length of your list — is the real measure of how diversified you are.
See it on your own portfolio
Find out which of these forces your ASX portfolio is most exposed to — in 60 seconds.
Keep reading
Why your ASX portfolio is probably more concentrated than you think
You can own a dozen Aussie shares and still be making one big bet. Here's why ASX portfolios hide concentration — and how to see it.
The hidden link between your bank shares and your mortgage
Own CBA shares and have a CBA mortgage? You might be more exposed to one part of the economy than you realised. Here's the quiet overlap.
PortLens provides general information only — not personal financial advice. Examples are illustrative. Always do your own research or speak with a licensed adviser before making investment decisions.
New to a term used here? See the plain-English glossary.