Diversification: what it does, and what it does not

The main families and how they behave

We usually distinguish productive assets (shares, stakes in businesses), real assets (property, precious metals), debt assets (bonds, savings accounts, deposits) and cash. Crypto assets form a category of their own, more recent and more volatile.

What matters is not how many categories you hold but how they behave: two assets that rise and fall together provide no diversification, however different their names.

What diversification reduces, and what it does not

It reduces specific risk: the risk that one particular asset does badly for reasons of its own. Spreading across several assets mechanically dilutes the effect of an isolated accident.

It does not reduce market risk: when a whole market falls, being spread across twenty lines of that same market offers no protection. Nor does it guarantee a gain, and it does not prevent losses.

False diversifications

The most common is multiplying lines within a single family: ten shares from the same sector and the same country largely behave alike.

The second is invisible duplication: several different funds may hold the same underlying companies, so you believe you are spread when you are in fact concentrated.

The third is forgetting the weight of a dominant asset. When one property makes up most of your wealth, how the rest is split changes little about the overall picture.

Seeing your real allocation

This is exactly where consolidated tracking changes what you can read. As long as assets sit across several institutions, you know each line but rarely the proportions.

In Finvygo, the split by asset class is computed across your whole net worth, debts deducted. The gap between the allocation you think you have and the one you actually have is often the most useful piece of information.