[miseg]

Dealing with retirement investment policicies offered in Ireland, I see two sides:

1. Actively managed funds diversified across equitieis, bonds, cash, etc

2. Index funds for specific indices, such as "top 4,000 US companies"

The danger with 2, they say, is you're not diversified. That'll be up to me I suppose to try to diversity into other areas.

[hrez]

What they mean is that it's all in highly correlated assets. It lacks diversification across non-correlated asset classes. Stocks (US and emergent), bonds and cash are less correlated than US companies even 4000 of them.

[arielweisberg]

Most popular index funds are very diversified. 4000 companies not diversified enough for you? There is research that suggests any 50 companies picked at random will give you quite a bit of diversification.

The real lack of diversity is that it's weighted towards US companies which some people have decided they want and others don't, and apparently it's weighted towards stocks as an asset class as well.

I don't think weighting is the same as lacking diversification, although certainly you are lacking one kind of diversification.

[iofj]

I would think that generally one means different things. Specifically, a diversified portfolio would hold stocks and bonds.

Or, if one is of the "stocks don't go up over the long term" persuasion, it means stocks + shorts (for a net market neutral portfolio) and bonds.

So no, popular index funds are not diversified. There are exceptions, of course.

[baus]

Maybe that is a function of your market, but indexing doesn't prevent you from becoming diversified.