You’re Probably Not as Diversified as You Think

You’re Probably Not as Diversified as You Think

One of the most common things I hear from prospective clients is, “I’m well diversified.”

Most of the time, they’re not.

Many investors own several different mutual funds or ETFs and assume that means they’re diversified. But when we look under the hood, we often find they own the exact same companies over and over again. Five different funds may all have Apple, Microsoft, Nvidia, Amazon, and Meta as their largest holdings. It looks diversified on paper, but in reality, it’s concentrated in the same handful of stocks and the same investment style.

Ironically, many investors have the opposite problem too—they’re over-diversified.

Owning 25 mutual funds, multiple ETFs, dozens of individual stocks, and several retirement accounts can create so much overlap that it becomes impossible to know what you actually own. Instead of improving returns or reducing risk, over-diversification often leads to “index-like” performance while adding unnecessary complexity and higher costs.

True diversification isn’t about the number of investments you own. It’s about owning assets that behave differently under different economic environments.

A properly diversified portfolio should have a clear purpose behind every holding. Each investment should earn its place by providing exposure you don’t already have—not simply duplicating what’s already in the portfolio.

The goal isn’t to own more investments.

The goal is to own the right investments.

As legendary investor Warren Buffett once said, “Diversification is protection against ignorance. It makes little sense if you know what you are doing.” While diversification remains an important risk management tool for most investors, effective diversification is about thoughtful portfolio construction—not simply accumulating more funds.

Sometimes, less really is more.

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Colin Symons, CIO Lloyd Financial Group

I know there’s a lot going on but I feel like I keep banging the same drum on the crush in semiconductor and momentum stocks. That’s important and also the product of a lot of the issues we’ve seen, lately, but here I want to focus on something that happened last week. Japan intervened in currency (FX) markets to support the yen and the US aided in that move, with Treasury Secretary Bessent even commenting that he believed the yen was too weak.

What’s going on, there? Japan has been deficit spending quite a bit with their new PM and they’re also a big oil importer, which adds to the deficit given the Iran war. Because of that, the yen hit roughly 40-year lows relative to the dollar. That’s hard on consumers and can spiral out of control as moves to support the consumer, such as broad tax cuts, can spur more inflation.

OK, but why does the Fed care? When asked, Trump said it was just about helping an ally. That sounds nice, but would you believe there’s also some self-interest at work there, as well? A stronger yen helps make their exports less competitive, our exports to Japan more attractive, and tariffs more effective. Yen volatility also creates more market disorder, particularly if it keeps hitting extremes.

Lastly, Japan is a massive holder of US assets. They’re the largest foreign holder of US Treasuries and protecting their currency could cause them to sell billions in the bonds. Considering the US struggles with rates and sticky inflation, that’s not something we want to have happen.

If, by chance, you’re wondering how Japan managed to buy the yen without selling their Treasuries, the Federal Reserve has a Foreign and International Monetary Authorities (FIMA) facility which allows them to pledge US Treasuries to borrow dollars. They’ve also said they plan to use the facility in the future to support the yen. Basically, the idea is to support the yen without hurting the Treasury market.

Those are the public talking points. I’d say another major matter is that Japan is the center of the carry trade, where investors borrow in yen to buy assets elsewhere, such as US AI assets. If that carry trade gets hit, we’d get an unwind in the US stock market, particularly in the already recently stressed tech sector.

Additionally, many believe AI is of strategic importance to the nation, and we’re in a race against China to develop the best AI systems. If the US believes winning the AI race is very important, they’re not going to want to damage a source of funding, such as the carry trade. Thus, keeping the carry trade going is very much in the interest of the US even from a national security standpoint. The carry trade helps us fight China.

Until something changes, it appears the US will continue to at least limit how weak the yen can get. The concern is that if the yen became too weak, it could hurt both the Treasury market and AI investment. Considering both of those areas have seen stress lately, it appears that support will reappear whenever they get too bad. That doesn’t mean AI stocks and Treasuries can’t go down, but any decline seems a bit more unlikely to happen or go too far.

ISM Manufacturing was 55.6 vs. exp. 54, the highest since 2022. Great number, and Employment went back to expansion.

The Treasury Quarterly Refunding Announcement (QRA) came out with nothing too exciting. Q4 should see $628B in funding assuming an end balance of $850B.

Barclays says 85% of SPX companies have beaten Q2 earnings estimates, well above the long-term average of 76%.

Palantir(PLTR) is up 17% after beating earnings handily and raising guidance.

ON Semiconductor (ON) is up 7% after beating and giving good guidance on strong AI business.

Caterpillar (CAT) crushed earnings and is up 7%.

JOLTS, Factory Orders, and Trade Balance today.

Bottom line: Good earnings march on

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Past performance is no guarantee of future returns.

Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy will be profitable

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