Are You Over-Diversified? The Problem With 700 Companies in Your Portfolio

Do you hold multiple ETFs in your portfolio? Most people do. ETFs are often marketed as a smart, diversified approach to investing.

But here’s a question worth asking: how many companies do you actually own?

The average ETF holds anywhere from a handful of stocks to thousands. A broad market ETF alone might track 500 companies, like the S&P 500. If you hold seven ETFs, each tracking just 100 companies, that’s 700 businesses your money is spread across. Some overlap. Most of the others are mediocre operations buried in an index, diluting the returns of the companies you’d actually want to own.

This is what we call over-diversification, and it’s one of the most common problems in modern ‘set and forget’ investment portfolios. The goal of diversification is to reduce risk. But past a certain point, adding more positions doesn’t reduce your risk. It reduces your returns, while keeping all the volatility of the broader market intact.

At Freedom Capital Advisors, a Florida-registered investment adviser, this is one of the first things we look at when a new client sits down with us.

A Better Way to Think About It

Imagine a friend offers you a chance to invest in some local businesses. There are 700 businesses within a 100-mile radius of your town. You could put a little money into every single one of them. Or, using what you actually know about those businesses, you could pick the 10 to 15 healthiest companies and put your money there.

Common sense says take the 15.

So why are so many investors holding the equivalent of all 700?

Why the Industry Built It This Way

This is the part that most financial content skips over, but it’s the most important part to understand.

At large brokerage firms, advisors typically operate under corporate guidelines. Those guidelines point toward a menu of approved products, and a significant number of those products are funds the parent company manages or earns fees on. The arrangement is called a 12b-1 fee: a marketing and distribution cost paid directly out of the fund’s assets and passed back to the firm. The investor rarely sees it listed as a line item.

The result: your money ends up in a fund your advisor’s firm earns fees on, spread across enough companies that short-term performance looks stable and defensible. If the portfolio tracks the market, nobody can point to a specific decision and say it was wrong.

From a corporate liability standpoint, this model is nearly bulletproof.

From a client standpoint, it’s a different story.

This isn’t about imputing bad intentions to individual advisors. Most of them are working within a system designed around corporate risk management, not client outcomes. But when the incentive structure points in one direction, the products end up pointing the same way.

Some investors genuinely prefer this approach. A portfolio that mirrors the market carries its own kind of logic, and for certain situations it fits. But if you’re trying to build meaningful wealth above the market, the set-it-and-forget-it ETF approach has real limits.

What We Do Instead

We are independent. We don’t earn commissions, and we have no house funds to steer you toward. Our entire revenue comes from the advisory fee our clients pay us directly, which means we do better when you do better. Our goal is to help your account grow while first and foremost, managing risk.

We approach every portfolio with a value-oriented mindset, looking for opportunities to buy quality businesses when they’re cheap rather than chasing trends. Our analysis runs from the fundamentals of the business itself (earnings, balance sheet, competitive position) and also through the technical analysis of the charts to identify the right entry and exit points.

We also work alongside a trusted independent research partner, The Oxford Club, whose work informs our thinking but never replaces it. We own our positions and our reasoning.

And for clients looking to generate income from their portfolios, we use a strategy called Yield Forge: a covered call approach that collects option premium on positions we already hold. Three income streams from a single holding: premium, dividends, and the potential for price appreciation.

The goal isn’t to own 700 companies. The goal is to own the right 10 to 20, know exactly why we own each one, and build a portfolio you can actually be proud of.

Frequently Asked Questions

What is over-diversification?

Over-diversification happens when a portfolio holds so many positions that strong performers can’t meaningfully move the overall return. Holding several overlapping ETFs can easily push your total company exposure into the hundreds, which means the portfolio ends up tracking the market broadly rather than benefiting from the specific companies you believe in.

Are ETFs bad investments?

Not inherently. ETFs are a useful tool for certain purposes, and low-cost index funds have a legitimate place in many portfolios. In fact, we use them in our portfolios selectively. The issue is using multiple broad ETFs as a wholesale replacement for thoughtful portfolio construction. Layering seven ETFs that each track similar companies doesn’t add diversification. It adds complexity and potential fee drag while producing returns that closely mirror the index.

How many stocks should a portfolio hold?

Academic research generally shows that most of the risk-reduction benefit of diversification kicks in around 20 to 30 non-correlated positions. Holding more than that adds exposure without meaningfully reducing volatility. The key is that those positions aren’t tracking the same underlying sector or market cap range, which is where ETF overlap becomes a real problem.

What does a fiduciary adviser actually do differently?

A fiduciary advisor is legally required to put your interests ahead of their own. This is not a universal standard across the financial industry. Registered investment advisers like Freedom Capital Advisors are held to a fiduciary standard, which means the advice we give has to be designed for your situation, not built around what our firm earns fees on.

What is a covered call strategy?

A covered call is an options strategy that generates premium income on a position you already hold. Think of it as collecting rent on a stock you own. The premium is income you receive regardless of whether the stock moves up, down, or sideways. Whether this strategy fits your portfolio depends on your goals and current holdings. We are glad to walk through it with you.

If your current portfolio feels like it’s moving with the market without really moving for you, it might be time for a second look. Schedule a free conversation with Ron or Logan at freedomcapitaladvisors.com.