Why Adding A Ninth Fund Rarely Changes Anything

Portfolios accumulate funds over time, often reaching a dozen or more. Beyond a small number of genuinely distinct holdings, each addition changes the portfolio very little.

Diversification benefits arrive early and then flatten

Combining assets that do not move identically reduces the variation of the combination. The effect is largest when going from one holding to a few.

Each further addition removes a smaller share of the remaining variation, and the curve flattens quickly. The tenth holding contributes far less than the second.

What remains after diversification is the variation common to the whole market, which no amount of additional funds within that market can remove.

Overlap makes many funds nearly identical

Broad funds covering the same market hold largely the same companies in similar proportions. Holding several of them multiplies the names without changing the exposure.

Regional and global funds overlap heavily too, since a global fund already contains the regions that a regional fund covers.

Looking through to the actual holdings, rather than counting funds, reveals how much apparent diversification is duplication.

Small positions cannot move the result

A holding representing a very small share of a portfolio cannot affect the outcome meaningfully, however it performs.

If such a position doubled it would change the total by an amount most holders would not notice, which means it is not doing the job it was added for.

Either a position is large enough to matter, in which case it deserves consideration, or it is not, in which case it is mostly administration.

Complexity has running costs

Every additional holding adds statements to read, rebalancing decisions to make and documentation to review. The burden grows with the count.

Complexity also makes the portfolio harder for someone else to take over, which matters more than most holders assume when they build it.

Charges vary between funds, and a long list makes it harder to see where costs are actually being incurred across the whole portfolio.

Additions should answer a specific question

A useful test is what a new holding provides that the existing ones do not, expressed in terms of exposure rather than of style or theme.

If the answer is that it covers something already held through another fund, the addition is duplication regardless of how different the name sounds.

Applying that test to existing holdings as well as prospective ones usually shortens the list, which is the more common problem in established portfolios.