Stocks in the same sector move together. Unprofitable growth names move together against interest-rate moves. Companies dependent on the same large customer or the same raw material move together even in different industries. And in real market stress the correlation between almost everything jumps to one — precisely when diversification was supposed to help.

The practical test needs no math: look at the portfolio and ask what happens on a day when rates surprise higher, or when one sector collapses. If the answer is "most of it falls together", you're concentrated, not diversified.

Cap exposure to any single sector — commonly 25–30% of the account. Count open risk by groups rather than by positions: if four positions in one sector risk one percent each, that's four percent of risk in a single group, and that is almost always too much.

Real diversification is measured in different revenue sources and different risk drivers, not in the number of rows in the account. Three companies from genuinely different industries diversify more than ten from the same one.