Diversification isn't about owning more — it's about owning different

Diversification is the closest thing investing has to a free lunch — but it's widely misunderstood. People think it means owning lots of things. What it really means is owning things that don't all fall at the same time.

Same risk, different names

Imagine you own four miners, two banks and a property trust. That's seven holdings, which feels diversified. But miners move together, banks move together, and a rate shock could hit the banks and the property trust at once. Behind seven tickers there are really only two or three bets.

The test that matters

The useful question isn't 'how many things do I own?' It's 'when bad news hits one of them, how many others fall with it?' If the answer is 'most of them', you're concentrated no matter how long your list is.

• Different sectors that respond to different forces.
• Australian and global exposure, so one economy can't sink everything.
• A mix that includes assets which sometimes zig when shares zag.

Real diversification isn't a longer list. It's holdings that disagree with each other.

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