Diversification has always been one of the simplest ideas in investing. Spread risk, reduce exposure, and avoid relying too heavily on any single part of the market.

Right now, that idea is being tested in a way that is not immediately obvious.

On the surface, portfolios still look diversified. There is exposure across sectors, regions, and asset classes. But underneath that, market performance is becoming increasingly concentrated. A small number of large companies are driving a disproportionate share of returns.

That creates a situation where portfolios can appear balanced, while behaving very differently.

This is not a new development, but it is becoming harder to ignore. As large-cap technology names continue to dominate index performance, their weight within portfolios naturally increases. Over time, that can lead to unintended exposure, even in strategies that are designed to be diversified.

For advisors, the challenge is less about reacting to this shift and more about recognising it early enough to manage it.

There is no single solution. Reducing exposure entirely is rarely practical, particularly when these companies continue to deliver strong performance. At the same time, ignoring the concentration risk can leave portfolios more vulnerable than they appear.

What is changing is the level of attention being paid to it.

Advisors are starting to look more closely at how diversification is measured, not just how it is presented. That includes stress testing portfolios against different market scenarios and considering how much of the outcome depends on a relatively small group of holdings.

It also brings client communication into focus. Concentration risk is not always visible, especially when markets are performing well. Explaining where that risk sits, and how it is being managed, becomes part of the advisory role.

Because the issue is not that diversification has stopped working. It is that the definition of diversification is becoming more complex.