Check whether the three investments you’re interested in are really different from each other.
Diversification is splitting investments among different assets and sectors.
This reduces dependence on a single asset. Three companies in the same sector may behave similarly, so the number of holdings alone does not guarantee good diversification. A diversified portfolio can still fall when the market declines.
Three game companies depend on some of the same factors. Combining different sectors changes exposures.
Check whether the three investments you’re interested in are really different from each other.
A sample portfolio holds four companies, all in one industry. If the same event hurts all four, the number of names offers limited protection. Compare industries, countries and the weight of each holding. Two positions of 50% each create different concentration from positions of 90% and 10%. Diversification concerns the exposures inside a portfolio, not simply the number of rows in its holdings table.
Concepts that help you compare
Two funds: Did we really diversify?
Different funds can hold the same companies. Check cumulative exposure, not just the number of funds. Diversification is assessed across companies, sectors, countries and asset types. Two funds with similar holdings can duplicate the same exposure. Check holdings lists and weights, the data date, policy, fees, currency, distribution or accumulation and tracking differences. Diversification can reduce idiosyncratic risk but does not eliminate broad market declines. There is no single list of funds suitable for everyone.
Comparison example: Half the portfolio in Fund A which has 40% in a fictional company, and half in Fund B which has 20% in the same company. Total exposure to it is 50%×40% + 50%×20% = 30%.
An index can weight companies by market cap, price or equal weight. A large number of companies does not guarantee balanced diversification. In a market-cap-weighted index, larger companies can have greater influence; sometimes only freely tradable shares are used and weight caps apply. In an equal-weight index, company weights are equal at rebalancing dates and then change with prices. An index is a measurement tool; to get exposure you can use a tracking product, whose results may deviate due to costs and tracking error.
Comparison example: In a fictional basket, Company A at 80% weight rises 10% and Company B at 20% weight falls 10%. Assuming initial fixed weights and no costs, the basket change is 0.8×10% − 0.2×10% = 6%.