You might own the same bet four times.

Here is a portfolio that feels diversified: an S&P 500 tracker, a technology ETF, a global growth fund, and four individual American technology companies. Seven holdings. Two of them are funds holding hundreds of companies between them. It looks like textbook diversification.

Now look underneath. The S&P tracker is heavily weighted to a handful of mega-cap technology names. The tech ETF holds the same names, with more concentration. The global growth fund holds them too, because they're the biggest growth companies in the world. And your four individual picks are — plausibly — from the same group.

You do not own seven things. You own one thing, seven times, and you're paying fees for the privilege. When that group falls, all of it falls together.

The three ideas you actually need

• Concentration — how much of your outcome depends on a small number of holdings. Nearly everyone is more concentrated than they believe.
• Correlation — the degree to which your holdings move together. Two assets that always rise and fall in unison give you the risk of one and the illusion of two.
• Overlap — the same underlying companies reaching you through several different funds without you ever choosing them individually.

Diversification is the deliberate management of the second one. Counting your positions is not a substitute for it, and it never was.

Correlation isn't fixed — and it betrays you when it matters

The cruellest part: assets that normally move independently have an unpleasant habit of falling together precisely during a serious market decline, when you were relying on them not to. Correlations tend to rise in a crisis. The diversification you thought you had is most likely to disappear exactly when you needed it.