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Retire With Confidence is the podcast designed to help you move beyond the fear of the complexity of finances so you can be financially free to achieve personal significance. Tune in with Josh Duncan each week to turn fear into fuel that drives you into Freedom & Significance.
Welcome to the retire with confidence podcast. If you're a high earning professional, business owner, or someone approaching retirement and wondering whether you are truly on track, you are in the right place. This podcast is all about helping you make smart, confident financial decisions without the fear, confusion, or sales pressure that so often comes with money advice. Each episode is designed to break down complex topics like retirement planning, investing, taxes, and cash flow in plain English so you can understand what really matters and avoid the most common and costly financial mistakes. Everything you hear here is educational, fiduciary focused, and grounded in real world planning experience working with clients just like you.
Josh:I'm your host, Josh Duncan, partner at F5 Financial Planning. Let's get started. Have you ever opened up your investment accounts, crawled through the list of holdings and thought to yourself, wow, I own a lot of stuff. I must be really diversified. You've got the S and P 500.
Josh:You've got a growth fund. You've got a technology fund, maybe an innovation ETF, a dividend fund, a value fund, an international fund, a global fund, a small cap fund, a mid cap fund. It feels responsible. It feels prudent. It feels safe.
Josh:But what if I told you that at some point, adding more investments to your portfolio can actually make it riskier, more expensive, and lower your long term returns? That's what we're talking about today. Diversification. We're going to define what diversification actually is. We'll talk about why it feels so safe, even when it's not.
Josh:Then I'll walk you through three very specific red flags that tell you your portfolio may have crossed the line. And finally, I'll give you a practical framework to clean it up without guessing, gambling, or starting over. If your goal is financial freedom for personal significance, then clarity and intentionality matter more than clutter. Let's dive in. First, what is diversification?
Josh:The term was popularized by legendary investor, Peter Lynch. It's a play on the word diversification, but with a twist. Diversification is what happens when adding more investments to a portfolio actually increases risk and lowers expected returns instead of reducing risk. It's diversification gone wrong. Now real diversification is powerful.
Josh:It spreads risk across different asset classes, sectors, geographies, and factors. It reduces the impact of any single company or industry imploding. But diversification happens when investors start buying more and more funds, not because they've thoughtfully improved diversification, but because they're afraid of missing something. And that fear is powerful. There's a psychological lure here I call the safety in numbers fallacy.
Josh:We think if we own more things, we're safer. If one stock wins big, we wanna make sure we own it. If artificial intelligence takes off, we want exposure. If emerging markets surge, we don't wanna miss it. If clean energy explodes, we wanna peace.
Josh:So what do we do? We buy everything. And emotionally, that feels good. It reduces FOMO or the fear of missing out. It feels like we've covered all the bases.
Josh:But here's the problem. Owning more line items does not automatically equal owning more diversification. In fact, sometimes it's the opposite. And that brings us to the illusion that tricks many investors. I've reviewed portfolios with 20 different funds.
Josh:20. And when we dig into the underlying holdings, guess what we find? The same top 10 technology stocks showing up in almost every single bucket. Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta. They're in the S and P five hundred fund.
Josh:They're in the growth fund. They're in the tech fund. They're in the innovation fund. They're in the large cap blend fund. So while you feel diversified because you have 20 funds, mathematically, you may just own the same companies over and over again.
Josh:Here's the contrast. Psychologically, quantity feels like protection, but mathematically, markets operate on diminishing marginal returns. The first layer of diversification, moving from one stock to a broad index, dramatically reduces risk. The second layer, adding international exposure, meaningfully improves diversification. But the tenth layer, the fifteenth overlapping ETF, you're not reducing risk anymore.
Josh:You're just slicing the same pie into thinner pieces. At some point, adding more funds does not materially improve your risk adjusted return. Instead, it introduces complexity, cost, and unintended concentration. So you may feel covered, but under the hood, you're often concentrated in the same underlying drivers. And that takes us to the first mechanical red flag.
Josh:Sign number one is what I call the correlation trap. Correlation measures how investments move relative to each other. A correlation of one means two assets move in lockstep. A correlation of zero means they move independently. Now here's where diversification shows up.
Josh:Many investors own the S and P five hundred, and then add a growth ETF, and then add a technology ETF. On paper, that sounds diversified. In reality, the correlation between those funds can be extremely high, sometimes point nine five or higher. That means when one drops, they all drop. When growth stocks struggle, your S and P 500 struggles.
Josh:Your growth fund struggles. Your tech fund struggles. It's not diversification. It's duplication. And right now, we're seeing a broader trend of sector convergence where a handful of mega cap companies dominate index performance across multiple strategies.
Josh:So your diversified bets may actually be one giant concentrated risk on large cap growth technology. When markets are rising, this doesn't feel like a problem. In fact, it feels brilliant. But when that one dominant driver reverses, your entire portfolio can move together in a way you didn't expect. That's the movement problem.
Josh:But there's also an invisible leak most investors don't see, and that's sign number two. Even if your overlapping funds are highly correlated, they all still charge fees. Maybe your S and P 500 fund costs 0.3%. But your thematic technology ETF costs 0.75 percent. Your innovation fund costs 0.8%.
Josh:Your niche sector fund costs 0.65%. And they all own many of the same underlying companies. So you're effectively paying multiple managers, multiple expense ratios for the same equity exposure. I call this the clutter tax. It's small enough to ignore in a single year, but over a decade, it compounds.
Josh:Let's keep it simple. An extra point 75% annual fee on a redundant fund may not sound like much, but on $500,000, that's $3,750 per year. Over ten years compounded, that's tens of thousands of dollars that never get the chance to grow for you. And that's just one fund. Multiply that across multiple overlapping positions, and you've built a slow leak into your wealth building machine.
Josh:Fees matter, not because we're trying to be cheap, but because every dollar you don't pay in unnecessary costs stays invested and compounds. Now, beyond the financial cost, there's another burden most investors don't talk about, the cognitive burden, and that's sign number three. When you have fifteen, twenty, or 30 line items in a portfolio, it becomes very difficult to see the signal through the noise. During market volatility, you're staring at a sea of red and green, which position is down for a good reason, which is down because of market rotation, which is redundant, which actually serves a purpose. Instead of clarity, you get confusion, and then there's rebalancing.
Josh:If you truly want to manage risk intentionally, you have to rebalance. But rebalancing 15 plus funds, especially in taxable accounts, can trigger unnecessary capital gains, wash shell errors, and trading mistakes. I've seen investors accidentally sell the wrong tax slot. I've seen them rebalance one fund, but forget it's nearly identical twin ETF. I've seen portfolios drift dramatically because it was simply too overwhelming to manage.
Josh:Complexity creates friction, and friction leads to inaction. And in investing, disciplined action matters. So if you've identified high correlation, creeping fees, and portfolio chaos, how do you fix it? That's where we shift from diagnosing the problem to reclaiming your strategy. If you suspect your portfolio has crossed into dangerous diversification, here's a practical framework I use with clients.
Josh:Step one, identify your core exposures. Strip the portfolio down conceptually. At its heart, most long term investors need exposure too. US equities, both large and small, international equities, developed and emerging markets, real estate investment trust, maybe some value tell depending on conviction. Look at each fund and ask what role does this play?
Josh:If two funds serve the exact same role with 95% overlap, you probably don't need both. Step two, merge redundancy into high conviction, low cost core holdings. Instead of owning three growth funds, pick one broad, cost vehicle that captures that exposure efficiently. Instead of layering sector funds on top of an index that already holds them, go with the index. The goal is not to eliminate diversification, it's to eliminate duplication.
Josh:And step three, establish a one in, one out rule. If you add a new fund to your portfolio, one must come out. This forces discipline. It prevents emotional buying based on headlines. It keeps the structure lean.
Josh:Step four, create a written allocation target. For example, 40% US large equity, 20% US small equity, 20% international developed equity, 10% emerging markets, 10% real estate investment trust, or whatever aligns with your goals, time horizon, and risk tolerance. Then rebalance to those targets periodically, not reactively. And finally, step five, remember your purpose. The goal of investing is not owning everything.
Josh:It's to compound capital efficiently over time, so you can live the life you care about. A streamlined portfolio doesn't mean boring. It means intentional. It means lower fees, lower stress, clearer decisions, and better long term compounding. Let's recap the three signs your portfolio may have crossed into dangerous diversification.
Josh:Number one, the correlation trap, where multiple funds move in lockstep because they own the same underlying companies. Number two, fee creep and expense bloat where overlapping funds quietly siphon away compounding power. Number three, analysis paralysis and rebalancing chaos where complexity makes disciplined management nearly impossible. More is not always better when investing. Diversification is powerful, but only when it's purposeful.
Josh:As a fee only fiduciary, my job isn't to sell products or chase trends. It's to design portfolios that align with your goals, minimize unnecessary costs, and minimize your regret. If your account feels cluttered, overwhelming, or suspiciously similar across multiple funds, it may be time to prune. Clarity creates confidence, and confidence allows you to stay disciplined when markets inevitably test your resolve. If you found this helpful, I encourage you to take a fresh look at your holdings this week.
Josh:Not with fear, not with FOLO, but with intentionality. If you found this episode helpful, please consider subscribing to the podcast and leaving a review. It helps more people find the show and continue learning how to make smarter financial decisions. I'm Josh Duncan, partnered F5 Financial Planning. If you would like to learn more about how we help our clients achieve financial freedom for personal significance, please visit our website at www.f5fp.com.
Josh:Thanks for listening, and I'll see you in the next episode.