Have you ever wondered if some of your investments are secretly canceling each other out? Imagine paying twice for the same stock and not even realizing it.
Example
We once did an audit of a client portfolio where they had a 401(k), multiple IRAs, and brokerage account. On the surface, his mix of funds looked diversified in each account, but we noticed two big inefficiencies when we did their audit. Each account had the same funds for the same diversification and when we ran the audit, we found Apple was stock held 23 times between the several accounts.
Here’s the kicker: while one fund manager was buying Apple, another was selling it. He was paying for multiple trades and ended up right where he started. That’s overlap.
The Hidden Cost of Overlap
- Redundancy: You think you’re diversified, but you’re just duplicating exposure.
- Transaction drag: Every trade carries hidden costs, spreads, slippage, and commissions. The SEC doesn’t require funds to disclose these costs.
- Phantom gains: Even if your account hasn’t grown, you may still owe capital gains taxes triggered by fund-level trades.
Style Drift & Hyper-Diversification
It gets worse. Funds often don’t even do what their names suggest.
For example, a “Large Cap Value” fund might hold:
- Less than half of their funds in true “ Large Cap Value” companies.
- The other half may be disbursed in Mid and Small Cap Funds.
This is called style drift. Funds stretch their mandate to chase returns, and investors pay the price.
And then there’s hyper-diversification. According to a University of Notre Dame study, the average ETF holds 261 stocks, with some holding more than 3,600. More isn’t better, it just creates dilution and overlap.
The Smarter Alternative: Focused Diversification + SMAs
Here’s the truth: owning thousands of stocks doesn’t give you much more diversification than owning 50–100 well-researched companies. Is there much benefit from that 101st stock in your portfolio from the 2001st stock?
- Studies show that most of the benefit of diversification occurs once you own about 30–50 names.
- A focused portfolio of 50–100 holdings can deliver nearly all the protection of a 2,000-stock fund without the bloat and overlap.
And here’s where SMA’s (Separately Managed Accounts) come in:
- With an SMA, you own the individual stocks directly.
- You pay a small fee for the research feed, but avoid paying both the fund company and your planner at the same time.
- It’s ETF-like pricing with the added benefit of intentional stock ownership and personalized planning.
In Summary
Owning more funds doesn’t make you safer. Overlap and style drift create inefficiency and hidden costs.
With focused diversification and SMAs, you can have both: low cost + intentional investing.
What is your next step?
Are you paying twice for nothing? Let’s find out. Let’s run an overlap audit and see how much duplication is hiding in your portfolio.”
References
- Da, Z., Han, Y., & Krishnamurthy, A. (2012). Exchange Traded Funds and Asset Return Correlations. University of Notre Dame.
- SEC Investor Bulletin: Mutual Fund Investing – Look at More Than a Star Rating.
- Statman, M. (1987). How Many Stocks Make a Diversified Portfolio? Journal of Financial and Quantitative Analysis.