Beware of Diworsification
I used to be a big spreadsheet guy.
I was the type of person who would constantly try to analyze the pros and cons of every single decision I made. I did this time and time again.
What really happened is it caused me to make worse decisions than I originally expected.
I have made poor choices on business decisions because I overcomplicated them. I have made poor choices in parenting, and in just running my life, for the same reason.
Sometimes simple is best. When you break a decision all the way down to first principles, simple is usually the answer.
Here is the trap I keep running into.
When you want things to be optimal, you sometimes overcomplicate them to compensate for it feeling too easy. A clean plan can feel like you missed a step.
So you add another tab to the spreadsheet. You add another fund to the account.
Today I want to talk about diworsification.
The word was popularized by Peter Lynch in his book One Up on Wall Street. He used it to describe companies that made themselves worse by expanding into businesses they did not understand.
The same thing happens in a portfolio. You keep adding funds in the name of being diversified, and you end up worse off, not safer.
How This Actually Happens
It usually does not start with a bad intention. It starts with a good one.
You already have a total market fund. Then you add an S&P 500 fund because it feels like a classic. Then you add a large-cap growth fund because those companies have been doing well.
Then you pick up a sector fund after a headline, or you open a new account because the signup bonus looked nice.
Now you have portfolio overlap. The same companies show up in fund after fund.
You also get redundant holdings, which is just overlap wearing a different shirt. Two funds can have different names and still own the same ten stocks at the top.
Style drift sneaks in too. A fund that was supposed to be a value fund or an international fund quietly starts looking like everything else you already own.
And if your money is spread across a 401(k), an old 401(k), a Roth IRA, a taxable brokerage, and an account you forgot about, impulse buys are easy to hide. Each account looks fine on its own. Together, they are a mess.
Here is a simple picture.
Say you own a total market fund like VTI, an S&P 500 fund like VOO, and a large-cap growth fund. That looks like three different ingredients.
It is not. Recent holdings show that VTI and VOO already share about 89% of their money in the same stocks. Names like NVIDIA, Apple, and Microsoft sit near the top of all three.
You did not get three kinds of diversification. You mostly bought the same companies twice, and then a third time with a growth tilt.
Those overlap figures move as companies rise and fall, but the point does not. More tickers on the statement is not the same thing as more diversification.
How It Hurts Your Portfolio
First, it can cost you more. Some of those extra funds charge higher fees for almost the same exposure. Even cheap funds add friction: more trades, more tax lots, and more time spent staring at a screen.
Second, it gives you a false sense of safety. You look at a list of eight funds and feel protected.
Underneath, a handful of giant companies still drive most of the result. When those names have a bad year, the "diversified" portfolio has a bad year too.
Third, it dilutes your conviction. When you own a little of everything, you do not know why you own any of it. That makes it easier to panic, tinker, or sell the wrong thing at the wrong time.
Just because you add more funds does not mean you have more diversification. Sometimes it leaves your portfolio more concentrated in the same risks, and harder to manage, which is its own kind of risk.
How to Avoid It
Here is what to do instead.
1. Look up the overlap. Plenty of free tools will show you how much two funds share. If the overlap is high, you probably do not need both.
2. Consolidate accounts where it is sensible. Old 401(k)s and leftover IRAs are where duplicate funds like to hide. Bringing them together, when it makes sense for your situation, makes the whole picture easier to see.
3. Build around a simple core. For a lot of people, that can be a total market fund such as VTI, or a target date fund if you want the allocation handled for you. Then only add a fund if it covers something the core does not.
4. Write down a reason for every holding. If you cannot explain in one sentence what that fund does that the others do not, it probably does not belong.
5. Set a rule before you add anything new. Decide in advance what would have to be true for a new fund to earn a spot. Do not make that decision in the middle of a hot streak or a scary headline.
6. Review the whole portfolio once a year. Not every weekend. Once a year, look at every account together and cut the overlap.
Pick one of these this week. The easiest starting point is to list every fund you own, across every account, on a single page.
Hit reply and tell me how many funds you actually have when you count all of your accounts. I read every single response.
A complicated spreadsheet did not make my decisions better.
A simpler one usually would have.
โ