The core idea
Diversification means spreading your money across investments that do not all rise and fall for the same reasons at the same time. When one part of the portfolio has a bad stretch, other parts may hold steady or move differently, so the overall portfolio is less dependent on any single outcome.
Diversification reduces the damage any one investment can do. It does not remove the risk that markets as a whole fall, and it does not guarantee a profit.
Many holdings is not the same as diversified
Imagine someone who owns shares in four Australian banks, two Australian insurers and an ASX financials ETF. That is seven holdings. But they are all exposed to the same economy, the same interest-rate cycle, the same housing market and the same regulators. In a downturn affecting Australian financial companies, they are likely to fall together.
Now imagine someone with just two holdings: a broad global share ETF and a fund of government bonds. Fewer line items, but exposure to thousands of companies across many countries, plus an asset class that has often — though not always — behaved differently from shares.
The dimensions of diversification
Asset classes
Shares, bonds, cash, property and crypto respond to different forces. The Asset Allocation guide explains how the mix between them shapes a portfolio.
Sectors
Banks, miners, healthcare, technology and consumer companies are affected by different conditions. The Australian share market is heavily weighted towards financials and materials, so an Australia-only share portfolio can be more sector-concentrated than it first appears.
Geography
Australia makes up a small fraction of global share markets. Holding only local shares ties your fortunes to one economy and one currency. Many investors also earn their income and own their home in the same country, which adds to that concentration.
Currency
Overseas assets introduce exchange-rate movement. That can add volatility, but it can also cushion local downturns when the Australian dollar falls. It is a trade-off, not a free lunch.
Correlation, in plain English
Correlation describes how closely two investments tend to move together. Highly correlated assets usually rise and fall at the same time; lowly correlated ones move more independently. Diversification works best when holdings are not highly correlated.
Two cautions. First, correlations change. In a severe market panic, many assets that normally move differently can fall together. Second, past correlation is only a description of history, not a promise about the future.
Crypto and diversification
Owning ten different crypto tokens is rarely ten separate bets. Most crypto assets have historically moved strongly with Bitcoin, especially during large falls. A portfolio of many tokens can therefore behave much like one concentrated position.
Hidden overlap between funds
ETFs are a convenient way to diversify, but holding several can create overlap. A global share ETF, a US share ETF and a technology ETF may all have large positions in the same few companies. The portfolio looks varied by name while being concentrated underneath. Each fund's issuer publishes its holdings, which is the most reliable way to check.
Common misconceptions
- "More holdings means less risk." Only if the holdings are genuinely different.
- "Diversification means lower returns." It usually means avoiding the very best and very worst outcomes of a single bet, not giving up growth altogether.
- "An ETF is automatically diversified." A broad index ETF is; a narrow thematic or single-sector ETF may not be.
- "Diversification protects against losses." It reduces dependence on one outcome; it does not stop a portfolio falling when markets fall broadly.
- "I'm diversified because I use several platforms." Where an investment is held says nothing about what it is exposed to.
How to think about your own portfolio
- Put every holding in one view, so nothing is forgotten.
- Look at the split between asset classes first.
- Check for single positions that represent a large share of the total.
- For funds, look at what they hold, not just their names.
- Ask what one event — a crash in one sector, one country or one coin — would do to the whole.
What Compndr does and does not show
Compndr shows your holdings across asset types and their share of your total, which makes concentration in a single holding or asset type easy to see. It deliberately does not produce a "diversification score" — a single number cannot capture the judgement involved — and it does not currently analyse sector, country or correlation exposure, or look inside ETFs. Those limits are described on the About page.
Next, ETFs vs Individual Shares looks at the trade-offs between the two most common ways of owning shares.