How it works
Diversification is the only free lunch in investing — it reduces risk without reducing expected returns. This calculator scores your portfolio across three dimensions: asset allocation (how well spread across stocks, bonds, real estate, cash), concentration (how concentrated in sectors and individual holdings), and geographic exposure (US vs international). Each dimension contributes to the final score out of 100. A score of 80+ means well-diversified. 60–79 is fair. Below 60 has significant concentration risk. Over-diversification (too many overlapping funds) also scores lower because it adds complexity without additional benefit. Compound interest works in your favor when you save and against you when you borrow. At 7 percent annual return, money doubles roughly every 10 years. At 20 percent credit card APR, debt doubles every 3.5 years. This asymmetry is why paying off high-interest debt before investing is almost always the right move — you are eliminating a guaranteed negative return that exceeds any reasonable investment return.
Formula
Diversification = Asset allocation score + Sector concentration score + Geographic score
Tips
- Aim for at least 3 asset classes with meaningful allocation (10%+).
- No single sector should exceed 30% of your stock allocation.
- International exposure should be 20–40% of total stock allocation.
- Your top 5 holdings should be under 25% of total portfolio.
Frequently asked questions
- How diversified should my portfolio be?
- Aim for a score of 70+. This means: 3+ asset classes, no sector above 30%, 20–40% international, and top 5 holdings under 25%. A simple 3-fund portfolio (US stocks, international stocks, bonds) achieves good diversification.
- Can I be too diversified?
- Yes — holding 20+ funds with overlapping holdings creates complexity without additional benefit. Focus on broad-market index funds that provide diversification within a single fund.
- What does the portfolio diversification score calculate?
- It takes stocks (%), bonds (%), real estate (%), cash & equivalents (%), largest single sector (%), us market exposure (%), top 5 holdings (% of portfolio) as inputs and computes diversification score, grade, asset allocation score, geographic score. The primary output is diversification score. Score your portfolio diversification across asset classes, sectors, and geography to identify concentration risk.