What Is Portfolio Diversification

When I reviewed my portfolio for the first time in detail, I expected to see a healthy mix of sectors.
Instead, I found something alarming — over 70% of my investments were in technology stocks.

It wasn’t because I went all-in on a single company.
Part of it came from several ETFs I thought were “diversified.”
The rest came from individual holdings in Apple, Microsoft, and NVIDIA — three of the largest tech companies in the world.

On paper, my portfolio looked balanced.
In reality, I had doubled up on the same sector through both funds and individual stocks.

That experience taught me what diversification really means — and why it matters.

The Basics of Diversification

Portfolio diversification is the practice of spreading your investments across different sectors, asset classes, and geographies.
The idea is simple: not all parts of the market move the same way at the same time.
When one sector struggles, others may hold steady or grow, helping balance out your overall returns.

Example: How to Check Your Diversification

Let’s walk through a realistic example from start to finish.

Step 1 – Get your holdings list

From your brokerage account, export all your current investments, including:

• Ticker symbols
• Number of shares
• Current market value for each holding

Example portfolio:

Step 2 – Check sector breakdown

Your brokerage’s “sector allocation” chart shows:

• Technology: 72%
• Healthcare: 10%
• Financials: 8%
• Bonds/Other: 10%

That 72% tech exposure is a red flag — but it might be even higher once we check ETF overlap.

Step 3 – Check asset class mix

• Stocks: $9,500 (32%)
• ETFs: $15,000 (50%)
• Bonds/Other: $5,500 (18%)

A balanced portfolio usually includes both growth investments (stocks) and stable assets (high yield savings, bonds, etc.), depending on your goals and risk tolerance.

Step 4 – Look for ETF/fund overlap and calculate total exposure

Open each ETF’s “holdings” tab on the provider’s site:

ETF1 top holdings (percent of ETF):

• AAPL – 6%
• MSFT – 5%
• NVDA – 4%

ETF2 top holdings:

• AAPL – 4%
• MSFT – 3%

Calculate Apple exposure from ETFs:

• ETF1: $10,000 × 6% = $600
• ETF2: $5,000 × 4% = $200
• Total Apple via ETFs = $800

Add direct Apple shares: $4,000 + $800 = $4,800 total Apple exposure.

Convert to % of portfolio:
$4,800 ÷ $30,000 = 16% in Apple.

Microsoft exposure:

• ETF1: $10,000 × 5% = $500
• ETF2: $5,000 × 3% = $150
• Direct shares: $3,000
• Total = $3,650
• Percentage: $3,650 ÷ $30,000 = 12.17%

NVIDIA exposure:

• ETF1: $10,000 × 4% = $400
• Direct shares: $2,500
• Total = $2,900
• Percentage: $2,900 ÷ $30,000 = 9.67%

Step 5 – Add them up for total sector exposure

Now add the percentages for Apple, Microsoft, and NVIDIA (all tech stocks):

• Apple: 16%
• Microsoft: 12.17%
• NVIDIA: 9.67%

Total tech concentration from just these three stocks = 37.84% of the portfolio.

When you add in other tech stocks in your ETFs, that number could easily match or exceed the 72% shown in your sector allocation chart — confirming your portfolio is heavily concentrated in one sector.

This final “add them up” step is the one most investors skip — and it’s often where they realize their true exposure is much higher than they thought.

Why It Matters

Without diversification, you’re exposed to concentration risk — the danger of having too much money tied to one sector, asset class, or region.
In my case, my “ETF-heavy” portfolio wasn’t nearly as balanced as it looked.
Those overlapping holdings — combined with my individual tech stocks — meant my performance was still almost entirely tied to the fate of one sector.
In 2022, when the tech sector fell sharply, many investors with heavy tech exposure saw their portfolios drop 20–30% or more in just months, regardless of how “diversified” they thought they were.

Fixing Imbalance

If you find you’re overweight in one area, you have a few options:

• Add positions in underrepresented sectors.
• Reduce positions in the overweight sector.
• Use ETFs or index funds that intentionally avoid heavy sector concentration.

Diversification doesn’t guarantee profits, but it can significantly reduce volatility and protect you from being overly dependent on one market segment.

Takeaway:
The day I discovered my 70% tech concentration — hiding inside ETFs and amplified by my individual tech holdings — changed how I invest.
Now, I check my sector breakdown, asset mix, and ETF overlap regularly.
Because sometimes the biggest risk isn’t the market itself, but what’s quietly hiding inside your own portfolio.

Disclaimer: This article is for educational purposes only and does not constitute financial advice. Always do your own research or consult a qualified financial professional before making investment decisions.