You may think you’re diversified because you own multiple mutual funds, ETFs, or separately managed accounts. Take a closer look. You may discover you’ve paid for overlap without gaining proper diversification.

Why overlap undermines diversification

Diversification isn’t about the number of investments you hold. It’s about how different they are from each other. You can own 15 mutual funds and still be overexposed to the same handful of large‑cap U.S. stocks if each fund holds Apple, Microsoft, Amazon, and Nvidia.

Overlap reduces your exposure to other asset classes. It dilutes the benefits of holding uncorrelated investments. The result is a portfolio that behaves like a single asset class, often large‑cap growth, even though you believe it’s diversified.

Familiar sources of unintended overlap

Overlap creeps into portfolios in subtle ways. You might hold a target‑date fund that includes broad‑market ETFs, a separate ETF tracking the S&P 500, and a growth mutual fund with top‑heavy positions in the same mega‑cap tech stocks.

Even managed portfolios from different platforms can wind up holding the same securities. Add sector‑specific or thematic funds, and the problem compounds. If you don’t see all your accounts at once, you may layer similar exposures across brokerage, IRA, and 401(k) accounts.

How to spot and quantify overlap

Start with a complete inventory of your holdings. Review the top 10 holdings, sector allocation, and market‑cap breakdown for each fund or ETF.

Tools like Morningstar or ETF.com let you compare portfolios side by side.

Look for repeated exposure to the same stocks. Watch for overconcentration in a single sector, especially technology or healthcare. Check whether you have limited international, small‑cap, or bond exposure. Investments moving together in different market conditions signal high correlation and minimal diversification benefit.

Strategies to build proper diversification

Here are some strategies for building diversification into your portfolio.

Consolidate core holdings : Rather than owning multiple funds that all track the same U.S. index, select one broad‑based ETF or mutual fund for your core equity exposure. For example, choose a total U.S. market fund or an S&P 500 fund, but not both.

Add uncorrelated asset classes : Consider adding asset classes that behave differently from your core holdings. These may include international developed markets, emerging markets, U.S. small‑cap and value stocks, bonds with different credit and duration profiles, or alternatives such as real estate or commodities used sparingly and with a clear purpose.

Focus on factor diversification : Academic research supports the long‑term benefits of exposure to value, size, profitability, and momentum. Portfolios tilted toward these factors often have different return patterns than traditional market‑cap weighted funds.

Reevaluate actively managed funds : Many active managers hug the index more than they admit. You will likely get overlap and underperformance if you pay higher fees for funds that look and perform like their benchmark. If you use active managers, ensure their strategies are differentiated and their holdings do not mirror your existing positions.

Coordinate across accounts : If you manage multiple accounts, like taxable, IRA, Roth, and 401(k), coordinate them as one unified portfolio. You don’t need to replicate the same allocation in each account. Instead, hold the most tax‑efficient assets in taxable accounts and the less tax‑efficient assets in retirement accounts. This strategy, known as asset location, can reduce your tax drag while minimizing overlap.

How OBBBA may affect diversification planning

The One Big Beautiful Bill Act, passed July 4, 2025, did not change Roth IRA contribution limits. Annual Roth IRA limits remain $7,000 for those under age 50 and $8,000 for those 50 and older.

The provision allowing rollovers of unused 529 plan assets into a Roth IRA (up to a lifetime cap of $35,000) stems from the SECURE Act 2.0, effective January 1, 2024. The rollover rules require the 529 plan to open for at least 15 years, and annual rollovers count toward the regular Roth limit.

OBBBA made the Qualified Business Deduction (QBI) deduction permanent and expanded the phase-in ranges for specified service trades or businesses (SSTBs).  It also raised the basic exclusion amount for estate and gift tax to $15 million per person beginning in 2026, indexed for inflation.

These changes may boost after‑tax income and free up capital to diversify across tax‑efficient vehicles.

Rebalance to maintain diversification

Even a well‑constructed portfolio can drift over time. Market movements may cause certain holdings to dominate, reintroducing overlap and skewing risk.

Set a periodic schedule, quarterly or annually, for rebalancing back to your intended allocation. Rebalancing forces you to sell high and buy low while reducing concentration in outperforming positions. Be mindful of tax consequences when rebalancing in taxable accounts. Coordinating across accounts and using tax‑loss harvesting can help manage the impact.

Final thought

Proper diversification is about the relationships between the assets in your holdings. By eliminating overlap, expanding into uncorrelated asset classes, and taking advantage of new tax and planning tools, you can build a stronger, more resilient portfolio that is aligned with your long‑term goals.

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