Many investors think they're diversified by holding multiple funds, but overlapping holdings mean they're not. True diversification requires funds with different underlying assets, not just a bigger pile of the same stocks.
False diversification is when you invest your money across different funds or managers but the underlying investments are all the same. For example, a novice investor might feel good to be invested in five different tech funds but at the end of the day those managers are all investing in the same stocks. When those stocks go down, all the funds are going to go down. When those stocks go up, all the funds are going to go up in value. It seems like diversification, but when you actually look under the hood, it isn't. Some advisors out there put their clients into dozens of different mutual funds and individual stocks. Every time I see it though, it's kind of a sign. It's obvious to me that that advisor needs to be fired. There's no reason for anybody to own 30 different mutual funds. There are very few good reasons for anyone to own individual stocks. Throw both of them into a portfolio and it's frankly the mark of an incompetent advisor or do it yourself investor. So don't go for false diversification.
Physician Takes a Youth Sports Team to the State Championship - MtoM Podcast #236
