Diversification Is About What Can Fail Together.

Diversification is not how many ticker symbols you own. It is how many different things can go wrong at once.

A client can hold ten funds and still own the same large companies repeatedly. A business owner can have a diversified brokerage account while the business, building and income all depend on one industry. An employee can hold broad funds and still have compensation, benefits and employer stock tied to one company.

I think the portfolio review needs to look through the labels and across the full balance sheet.

Count exposures, not account statements

Investor.gov explains that a mutual fund or ETF is not necessarily diversified, especially when it focuses on a narrow sector. Several funds can also hold many of the same investments.

And so I would ask what each holding actually owns, which economic risks drive it and where the overlaps sit. A U.S. stock fund, technology fund and growth fund may sound like three categories while sharing the same largest positions.

The account statement counts products. The planning work counts exposures.

The largest concentration may be outside the portfolio

For business owners, the company is often the largest asset and the primary source of income. Real estate may be tied to the business. A spouse may work in the same industry. That household already has a concentration before the brokerage account is considered.

FINRA defines concentration risk as the potential for amplified losses when a large portion of holdings sits in one investment, asset class or market segment. I would extend that review to the client’s economic life. What affects the investment account may also affect income, borrowing capacity and the business valuation.

Diversification cannot remove every risk. It can reduce the chance that one event controls every part of the plan.

A concentrated position creates a transition problem

The decision to diversify can be easy to describe and difficult to implement. The position may carry a large unrealized gain. It may have emotional significance or voting rights. The client may be subject to trading restrictions. The stock may be connected to employment or a business sale.

This is where I think the CPA perspective matters. IRS Publication 550 explains the federal treatment of investment gains and losses. The investment reason to reduce concentration should be viewed beside those capital-gain consequences, charitable plans, loss positions, cash needs and the accounts available for rebalancing.

A tax cost does not automatically make the sale wrong. Ignoring the tax cost does not make the plan diversified. The transition needs a reason and a sequence.

A hypothetical household with hidden repetition

Consider a hypothetical executive whose employer stock represents 25% of investable assets. The executive also owns a broad large-company fund, a growth fund and a technology ETF. A review shows that the employer and several other large technology companies appear across all three funds. The executive’s bonus also depends on the same industry.

Selling the employer stock in one transaction may create a tax result the client does not want. Doing nothing leaves the household exposed. The plan could use new contributions, dividends, selective sales, charitable giving where appropriate and rebalancing in tax-advantaged accounts to reduce the concentration over time. The exact sequence depends on restrictions, basis and goals.

The number of accounts did not create diversification. The transition plan does.

Diversification still needs a job

A diversified portfolio is not automatically the right portfolio. Asset allocation still needs to reflect the client’s time horizon, cash needs and ability to tolerate loss. Near-term spending should not depend on the same risk as long-term growth capital.

I would review concentration after large market moves, compensation events, business changes and major withdrawals. New cash flows may solve part of the problem without creating unnecessary trades. Other times, a sale is the cleanest answer.

Ask one direct question: if this company, industry, property market or income source has a difficult year, what else in the plan is likely to be difficult at the same time? That answer is the diversification review.