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Does industry diversification matter for your portfolio?

I regularly write about how I believe diversification is important for your portfolio. Owning Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) isn’t being diversified, despite owning four different shares.

But should you throw in a resources business, a telco, a retailer, a healthcare business and a tech share just for the sake of diversification?

I don’t think you should buy a business just because you’re underweight to one particular industry. I do not directly own any resource shares, telcos or retailers in my portfolio.

The main thing to make sure of is that your portfolio isn’t exposed to a lot of the same risks. All the big banks and smaller banks are exposed to the housing market.

Xero Limited (ASX: XRO) and Gentrack Group Ltd (ASX: GTK) are both high quality businesses. They are both software as a service (SaaS) businesses. They both have businesses as clients. However, that’s where the similarities end. Xero is related to the accounting industry and Gentrack is related to the utility and airport industries. They have completely separate risks, apart from valuation.

Ramsay Health Care Limited (ASX: RHC) and Medibank Private Ltd (ASX: MPL) are classified as operating in different industries but the biggest risk to both of them is private health insurance affordability.

Blackmores Limited (ASX: BKL) and Bellamy’s Australia Ltd (ASX: BAL) offer completely different products but they both rely on the Chinese consumer.

Foolish takeaway

Ultimately, industry diversification doesn’t really matter for your portfolio. You should fill your portfolio with the shares you think are best for your portfolio. As long as your shares aren’t all exposed to the same business risks then your portfolio should be able to weather any storm that comes along.

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Motley Fool contributor Tristan Harrison owns shares of Ramsay Health Care Limited. The Motley Fool Australia owns shares of and has recommended Blackmores Limited. The Motley Fool Australia owns shares of National Australia Bank Limited and Xero. The Motley Fool Australia has recommended GENTRACK FPO NZ and Ramsay Health Care Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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