Owning thirty stocks is not the same as being diversified.

Owning thirty stocks is not the same as being diversified

A long list of names can still be one bet wearing a disguise.

Open most income portfolios and you find a long list. Thirty names, sometimes forty, added one good idea at a time over many years.

The length of that list feels like protection. Then you sort the names by what they actually do for a living, and something uncomfortable shows up. A large share of the income is coming from a handful of the same corners of the market.

A portfolio built that way holds three or four bets, cut into thirty pieces. When one of those corners has a bad decade, most of the paycheck goes with it.

Counting names is easy. Checking what those names depend on is the work that protects the income.

Thirty names, three sectors, one hard year

Sorting a portfolio by what it owns tells a different story than counting it.

Picture a $600,000 income portfolio spread across 30 names, $20,000 in each, at an average yield of 5 percent. That produces about $30,000 of dividends a year. Round numbers, real arithmetic.

Now sort the list by sector. Ten of the names are real estate trusts, six are energy, and five are utilities. Those 21 names are 70 percent of the money, and they sit in three corners of the market that answer to the same interest rates, the same commodity prices, and the same slowdowns.

Say a hard year arrives and the real estate and energy names, 16 of them, cut their payouts in half. Their share of the income falls from about $16,000 to about $8,000, so the portfolio pays about $22,000 over that year rather than $30,000. The list still holds 30 names, and the paycheck for that year is 27 percent smaller.

Something close to that happened in 2020. Dozens of real estate trusts cut or suspended their dividends in the spring of 2020, and Shell, one of the largest oil companies in the world, cut its dividend by about two thirds in April 2020, its first cut since the 1940s.

The risk worth naming: sector concentration never shows up on your account summary. The screen shows thirty tickers and a total, and it says nothing about how much of the income leans on the same few forces. Cuts inside a sector tend to arrive together, in the same season, which is the season a reader needs the income to hold.

Illustrative example with round numbers and assumed rates, not a forecast. General education, not advice.

We count names because names are easy to count.

Adding one more name to the list feels like adding protection. It is a small and satisfying act, and nothing in the moment asks whether the new name behaves like the ones already sitting there.

Researchers have a name for the habit. Naive diversification is our tendency to spread money across whatever choices sit in front of us and treat the spreading itself as safety, without checking whether those choices move together.

Yield screens feed the habit. A list sorted by highest yield keeps handing back the same few sectors, so an investor who buys near the top of that list ten times over ten years can end up owning ten versions of one idea.

That is the issue. This week's move takes two minutes: pull up your income holdings and write the sector beside each name. Then work out roughly what share of your yearly dividends comes from the biggest sector on the page.

If one sector carries more than a third of the income, you have found your next piece of work.

Hit reply and tell us which sector came out on top. We read every response, and it shapes what we write.

New issues arrive Wednesday mornings.

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