Six Funds. One Portfolio. More Overlap Than You Think.

Global doesn’t necessarily mean evenly global

The word “global” can be misleading because it sounds as though your money has been spread fairly evenly around the world.

That isn’t how a market-cap-weighted global index works.

It doesn’t give America, Europe, Japan and the emerging markets an equal share. It allocates more to the markets and companies that have become the largest.

For much of the past decade that has meant an increasingly large allocation to the United States, helped enormously by the rise of its biggest technology companies.

There are good reasons for America’s dominance. It has produced some of the most profitable and successful businesses the world has ever seen. The point isn’t that investors should avoid them. I certainly wouldn’t.

The question is how much of your financial future you want resting on the assumption that the companies and market that dominated the last decade will dominate the next one too.

History isn’t particularly reassuring on that point.

In 1989, Japan represented an extraordinary share of the global stock market. Japanese banks and industrial companies filled lists of the world’s largest businesses and the economic arguments for their continued dominance sounded perfectly convincing.

Then the world changed.

Japan didn’t disappear and its great companies didn’t suddenly become worthless. Investors simply discovered, painfully, that a wonderful company or economy can still be a poor investment if too much optimism is already reflected in its price.

2026 has been a useful reminder

For years, diversifying away from the largest US companies could feel like owning a collection of things that stubbornly refused to do anything useful.

That is the uncomfortable bit of diversification that tends to get forgotten.

If everything in your portfolio is performing brilliantly at exactly the same time, there is a reasonable chance you aren’t as diversified as you think.

This year has provided a useful reminder. Smaller US companies have enjoyed periods of significant outperformance over their largest counterparts, while markets outside the United States have also competed much more strongly with the US.

That doesn’t tell us what will outperform next year. Nor does it mean the era of American technology companies is over. Trying to make either prediction would rather miss the point.

It tells us that leadership changes.

And it usually changes after investors have become thoroughly accustomed to the idea that it won’t.

The companies that matter are surprisingly difficult to find

One of my favourite pieces of investment research looked at the long-term returns of individual US shares and reached an extraordinary conclusion.

Most of the wealth created by the stock market came from a tiny minority of companies.

That helps explain why trying to pick tomorrow’s winners is so difficult. The eventual winners matter enormously, but identifying them before they become obvious is another matter entirely.

Some of today’s giants barely existed a generation ago. Others were much smaller businesses that few investors could have confidently predicted would eventually become among the most valuable companies on earth.

At the same time, many companies that once appeared untouchable have slipped down the rankings or disappeared from them altogether.

The answer, for me, isn’t to make increasingly elaborate predictions about which ten companies will rule the world in 2040. It is to make sure I don’t need to know.

That is one of the great advantages of diversification. You can own tomorrow’s winners before you know their names.

Look through the labels

When I review a portfolio, I want to know what sits underneath the fund names.

How much is actually invested in the United States? How much sits in the largest companies? How much is in smaller businesses? What exposure is there to developed markets outside America and to emerging markets? Are several funds doing essentially the same job? Has one successful part of the portfolio grown so much that it now dominates everything else?

The answers can be quite different from what the list of fund names suggests.

There is also nothing inherently wrong with having a large allocation to the United States or owning plenty of Apple, Microsoft or Nvidia. A market portfolio will naturally hold more of the world’s largest companies.

The important distinction is between an exposure you understand and one you have accumulated accidentally.

If you own a global tracker and deliberately add an S&P 500 fund because you want more US exposure, that’s a decision. If you own five funds believing each one has made you more diversified, only to discover that all five have increased your exposure to substantially the same companies, that’s something else.

Diversification should occasionally be disappointing

This is perhaps the hardest part to accept.

A genuinely diversified portfolio will nearly always contain something you wish you didn’t own.

There will be a market that looks dull, a group of companies that has lagged for years or a region everybody seems to have forgotten. Meanwhile, another part of the portfolio will be doing spectacularly well and you’ll wonder why you don’t simply put more money there.

That discomfort isn’t necessarily evidence that diversification has failed. It can be evidence that it is doing exactly what it was supposed to do.

Different assets are meant to behave differently.

The difficulty comes after one part of the market has won for so long that owning anything else begins to look foolish. That’s usually when investors are most tempted to abandon diversification and put more money behind what has already worked.

Nobody rings a bell when market leadership is about to change.

Count exposures, not funds

If you haven’t looked properly at your portfolio for a while, ignore the number of funds for a moment.

Look at the largest holdings in each one. See how often the same names appear. Look at the geographical allocation and the proportion sitting in the biggest companies. Work out whether each fund genuinely adds something different or simply gives you another route to the same place.

You may discover that a portfolio you thought contained ten different ideas actually contains three.

That doesn’t mean you need to rebuild it. It means you should know.

Because diversification isn’t measured by the number of lines on a statement. It’s measured by what you actually own underneath them and whether enough different things can go right for you not to depend too heavily on any one of them.