Is your ASX share portfolio too diversified?

Too much of a good thing can negatively impact your portfolio.

| More on:
A large transparent piggy bank contains many little pink piggy banks, indicating diversity in a share portfolio

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Even if you're a beginner, diversification is probably a term you've come across numerous times on your path to building an ASX share portfolio.

We're constantly told that diversification is an important part of building a resilient portfolio of shares, providing protection against single-company risk, as well as other unforeseen events such as the dreaded 'Black Swan'.

Yet some investing experts caution against too much diversification. Legendary investor Warren Buffett even once famously said:

Diversification is protection against ignorance. It makes little sense if you know what you are doing.

To be fair, Buffett puts his money where his mouth is. Although his company Berkshire Hathaway holds dozens of individual stocks, one stock – Apple – has, in the past, made up more than 40% of its entire portfolio.

But Buffett is Buffett. So how much diversification should we mere mortals aim for in our own portfolios?

How much diversification is too much for an ASX share portfolio?

At the end of the day, it all comes down to your individual circumstances, risk tolerances and goals.

Some investors are experts within a certain field, and invest accordingly. If you know everything there is to know about gold mining and the precious metals industry and market, for example, then owning one or two gold mining companies that you have personally assessed might work for you.

Most of the world's wealthiest people own a huge amount of one or perhaps two single stocks.

If that is indeed a mould one fits in, then there is nothing inherently wrong with this approach. However, most investors do not fall into this category.

That's why I tend to believe that almost every investor should aim for at least some diversification in their stock portfolios.

If you don't like investing in broad-market exchange-traded funds (ETFs), we here at the Motley Fool usually advocate that investors should aim to hold between 15 and 25 individual shares in a portfolio. This is normally enough to give an investor exposure to a number of different, uncorrelated sectors while maintaining the potential for significant market outperformance.

However, using ETFs and index funds is a great way of boosting your portfolio diversification. An index fund represents an investment in every single company that makes up an index.

The world is our oyster

For example, buying a popular ASX 200 index fund like the iShares Core S&P/ASX 200 ETF (ASX: IOZ) means buying a small slice of the 200 largest companies listed on the Australian markets. That's everything from Commonwealth Bank of Australia (ASX: CBA) to Ampol Ltd (ASX: ALD).

Just having an index fund like IOZ as your only investment is arguably enough to call your 'portfolio' diversified.

However, many investors like to add additional ETFs and index funds to an ASX-based portfolio. Australia is only one, relatively mid-sized, economy in the world.

Buying up additional investments in other markets like the United States provides even more diversification, offering protection against fluctuations in the Australian dollar, as well as Australia-centric economic problems.

As such, you could pair an ASX index fund with an American one, such as the iShares S&P 500 ETF (ASX: IVV), for even higher diversification. This will give you exposure to the best of both Australian markets and world-dominating companies like MicrosoftAmazon, and Coca-Cola.

But why stop there? You could instead pick the Vanguard MSCI Index International Shares ETF (ASX: VGS), which offers exposure to the US markets and other advanced economies like the United Kingdom, Japan, Switzerland, and Germany.

You could even invest in the Vanguard FTSE Emerging Markets Shares ETF (ASX: VGE) to gain additional exposure to emerging economies such as India, Taiwan, Brazil, Saudi Arabia, and Mexico.

Finding the right balance for your ASX share portfolio

If you split your portfolio between the iShares S&P/ASX 200 ETF, the Vanguard International Shares ETF and the Vanguard Emerging Markets ETF, you'll have indirect exposure to almost 6,300 different companies. How's that for diversification?

Now, there's nothing inherently wrong with going for this much variety in your portfolio. However, it is worth noting that the more you diversify, the less likely you are to obtain a high rate of return.

When you combine so many markets and companies, the strong performers are likely to balance out the weak, leading to a flatter, lower overall return.

I personally stick with diversifying across just the Australian and American markets, which I think gives good exposure to the best companies in the world but with enough diversity to mitigate against single market and currency factors.

Should you invest $1,000 in Agl Energy Limited right now?

Before you buy Agl Energy Limited shares, consider this:

Motley Fool investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and Agl Energy Limited wasn't one of them.

The online investing service he’s run for over a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

And right now, Scott thinks there are 5 stocks that may be better buys...

See The 5 Stocks *Returns as of 3 April 2025

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Sebastian Bowen has positions in Amazon, Apple, Berkshire Hathaway, Coca-Cola, and Microsoft. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon, Apple, Berkshire Hathaway, Microsoft, and iShares S&P 500 ETF. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool Australia has recommended Amazon, Apple, Berkshire Hathaway, Microsoft, Vanguard Msci Index International Shares ETF, and iShares S&P 500 ETF. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on How to invest

Piggy bank on US flag with stock market data.
How to invest

Are American shares safe with the falling US dollar?

With the US dollar looking shaky, I'm turning to Warren Buffett's advice.

Read more »

A young well-dressed couple at a luxury resort celebrate successful life choices.
How to invest

Why investing $500 a month in ASX shares could make you rich

If you want to become rich, then this could be one way to do it.

Read more »

A man with a wide, eager smile on his face holds up three fingers.
How to invest

Beginner investor? Here's a simple 3-stock ASX portfolio to get you started

You don't need to start with a big portfolio. Here's how simple it could get.

Read more »

Beautiful holiday photo showing two deck chairs close-up with people sitting in them enjoying the bright blue ocean and island view while sipping champagne and enjoying the good life thanks to Pilbara Minerals share price gains in recent times
How to invest

The easy way to build significant wealth with ASX shares

Here's the easy way to succeed in the investing world.

Read more »

A panel of four judges hold up cards all showing the perfect score of ten out of ten
How to invest

How to build the perfect ASX share portfolio

How is it possible? Let's find out.

Read more »

Happy young man and woman throwing dividend cash into air in front of orange background.
How to invest

How to become a millionaire by investing in ASX shares

It isn't as hard as you think to become rich with investing.

Read more »

Man drawing an upward line on a bar graph symbolising a rising share price.
How to invest

The power of compounding: What $1,000 a month in ASX shares could become

Compounding is your best friend in the world of investing.

Read more »

$100 Australian notes on top of each other.
How to invest

How to build a winning $250,000 ASX share portfolio starting from zero

These are the steps I would take to grow wealth with ASX shares.

Read more »