You’re probably overdiversified, and it’s costing you millions

Hi ,

Focus Is the New Diversification

I’ve spent most of my career living at the edge of concentration.

Owning one company. One market. One shot that had to work.

If you’re an entrepreneur, business owner, or W-2 employee, odds are, you’re concentrated.

You’ve poured time, energy, identity, and maybe capital into one asset — your business or your job.

We bet on ourselves because it’s the card we have, and we play it with conviction.

And that conviction always carries risk. A single market change, a reorg, or a soft economy can clip our ability to earn or build at the same rate. It reveals the risk of concentration.

The textbook tells us the antidote to risk is diversification.

After selling my first company, I did what most people do.

I diversified. I spread capital everywhere — public markets, index funds, new deals, all of it.

And for a while, it felt safe. But safe didn’t feel productive.

I’d traded control for noise.Then the stock market dropped 40% and ‘safe’ suddenly felt like the riskiest move of all.

Along the way I noticed something.

In stock portfolios, wealth managers routinely placed 4–6% of the account balance in each equity — large enough to benefit from conviction, small enough to diversify.

I saw the same pattern in venture and private equity funds. They typically built 12–24 holdings per fund.

Why?

I began to find clues. One wealth manager wrote that billionaires become billionaires by taking concentrated risks in their companies. Yet for investors building diversified portfolios, the goal is conviction per position — without the over-concentration of an operator whose entire fortune depends on a single IPO.

I wanted my capital to work as hard as I did. Having an over-concentration in my own business was inevitable — so how could I make the rest of my money work better?

The line between conviction and risk isn’t in the market timing, it’s in your design.

One investment is pure risk.

Too many results in mutual fund-like returns (i.e. low)
Somewhere in between lies the optimal range.

So what does this empirical evidence suggest is the right amount of holdings And how can we use this to engineer our own portfolio of alternative investments?

If you’ve ever wondered how to reduce risk without sacrificing upside, this issue is your answer.

Here’s what we’re covering today:

• Stack Shift: The Concentration Threshold — why diversification stops working after two dozen holdings, and how to solve it (plus this week’s report).

• Case Study: A real-world example of disciplined concentration — a 20%+ IRR engine.

• Playbook: The 12–24 Rule™ — a step-by-step framework to build your own alt stack.

This is about conviction with architecture. It’s how you bridge from $2m to $20m, the foundation of this week’s issue, and our team’s research. 

Let’s dive in.

— Walker Deibel
WSJ & USA Today Bestselling Author of Buy Then Build
Founder, Build Wealth

SHIFT YOUR STACK

The Concentration Threshold

Entrepreneurs live at one extreme of the risk spectrum.
One business. One market. One bet that consumes a decade of their life.

When they sell, advisors rush in with the same prescription — diversify.
Move from total concentration to a hundred small positions. From redwood to brushfire.

That advice overshoots the goal. True diversification stops working after roughly two dozen holdings.

Our research modeled three portfolios: a single asset, a broad index, and a balanced basket of 12–24 holdings. The results were decisive. Once a portfolio crosses a dozen uncorrelated positions, roughly 80% of the available risk reduction has already been achieved. After 24, the curve goes flat. Volatility barely moves while returns get watered down.

This is the principle behind the 12–24 Rule™ — portfolio concentration calibrated for endurance. It marks the line where diversification’s benefits plateau and conviction begins to compound.

Top investors already operate here. Private equity funds rarely hold more than two dozen assets. Wealth managers size their positions around four to six percent each. Even Buffett’s circle has warned that excessive diversification is simply risk aversion disguised as prudence.

For private investors, the takeaway is simple: design your stack like a professional allocator. Build toward 12–24 distinct, high-conviction positions across credit, real estate, equity, and energy. Spread them by vintage, not volume. Enough breadth to weather drawdowns. Enough focus to drive meaningful performance.

This week, we published a full analysis unpacking the data behind this rule — including the simulations, volatility math, and case studies that prove its edge. Read the report and see where conviction meets resilience.

You will read more about the 12-24 Rule™ throughout this issue. To attend our upcoming webinar on this framework, follow Walker Deibel on LinkedIn. 

CASE STUDY

Audax Group and the Power of Disciplined Concentration

How a 20-Holding Fund Design Turned Focus Into a 20%+ IRR Engine

In the early 2010s, Audax Group began to reshape its approach to private equity. Founded in 1999, the Boston-based firm had built a reputation as a buy-and-build specialist in the lower middle market — completing more than 160 platform investments and 1,400 add-ons. The results were solid, not spectacular: safe mid-teens IRRs, high activity, limited conviction.

Then Audax made a structural shift. Instead of chasing volume, it began engineering focus. The firm reduced platform count per fund to roughly 15–25 core holdings, each large enough to matter, each backed by a deep operating thesis. They applied  conviction systematically;what some call “Intelligent Concentration.”

The logic was simple: concentration builds conviction, and conviction compounds faster.

Inside the Audax Model

Audax’s evolution mirrors the 12–24 Rule™ in institutional form:

• Conviction Allocation: Each platform company receives a meaningful percentage of fund capital — typically 4–8% — forcing sharper underwriting and deeper operational alignment.

• Sector Specialization: Rather than scatter across the economy, Audax built vertical expertise in business services, healthcare, and industrials — three durable cash-flow arenas.

• Vintage Diversification: Capital is deployed over multiple years, allowing the firm to blend entry valuations and macro environments across cycles.

According to Preqin’s private equity benchmarks and Hamilton Lane’s Middle Market Advantage report, concentrated mid-market funds like Audax’s consistently deliver top-quartile results — often producing gross IRRs around 25% and net IRRs north of 20%. The portfolio concentration — around twenty holdings per fund — captures nearly all diversification benefits while preserving alpha from operational control and repeatable playbooks.

Compounding by Design

Audax’s buy-and-build funds exemplify how designed concentration creates durability. Each platform averages four to six add-on acquisitions — enough to scale EBITDA and valuation multiples while maintaining operational intimacy.

Over time, that structure compounds:

• Focused platforms outperform because management attention isn’t diluted.

• Deployment across vintages smooths returns and captures multiple cycles.

• A 20-holding fund captures 80–90% of diversification benefits while preserving performance asymmetry.

It’s portfolio architecture with conviction built in.

The Broader Pattern

Audax isn’t an anomaly. This intentional-focus trend defines the modern playbook across the most successful private-equity firms:

• Berkshire Partners builds roughly 15–20 core positions per fund.

• Leonard Green & Partners targets similarly tight concentration in retail and services.

• Constellation Software runs its public company like a permanent-capital PE fund — about 20 verticals compounding through time.

• Shore Capital Partners operates in the lower middle market with concentrated, sector-specific platforms and repeatable roll-ups.

And at the upper end, Thoma Bravo proves the same law at scale. Its software funds often hold fewer than 20 core platforms yet deliver 25–30%+ IRRs, among the best in the world.
It’s a vivid reminder: conviction compounds faster.

Even Berkshire Hathaway’s $287.2 billion portfolio remains unapologetically concentrated (as of May 2025). One glance at the Visualytiks sector chart tells the story: across his top 5 sectors over 91.42% of Buffett’s capital is tied up in just 12 holdings: Financials, Technology, Consumer Staples, and Energy.

The 12–24 Rule™ isn’t just a heuristic. It’s how the best allocators in the world actually construct portfolios — concentrated enough to matter, diversified enough to last.

Audax Group and its peers show that the future of investing isn’t about owning everything. It’s about owning enough — with conviction, design, and time on your side.

These firms executed what the data already showed. That concentration wins when it’s engineered. Now let’s break down how to do it in your own stack.

THE PLAYBOOK

In a portfolio that follows the 12–24™ Rule, conviction is a strategy. Diversification is a tool. The edge comes from knowing exactly where to draw the line between them.

After nearly two decades of buying companies, I learned this lesson the hard way. Every deal felt like betting the house on one idea. Concentration can build wealth, but only when guided by structure.

The 12–24 Rule™ turns that principle into practice: a clear framework for designing an efficient, resilient private portfolio.

Step 1: Curate for Asymmetry

The quality of inputs defines the outcome.
Before adding any position, define what qualifies for your stack. Search for opportunities with three traits:

• Cash Flow Visibility – predictable, measurable income.

• Durable Edge – operator quality, defensible moat, or advantageous tax structure.

• Asymmetric Upside – limited downside, open-ended compounding potential.

Curation creates focus. Each position must earn its place with a clear, durable rationale.

Step 2: Concentrate with Intent

Concentration without design is speculation. Concentration with structure is strategy.

Aim to build 12–24 distinct holdings over time across private-market verticals — credit, real estate, equity, and energy — and size each for balance rather than symmetry.

• Credit: 4–6 positions generating monthly or quarterly distributions.

• Real Estate: 4–6 positions providing inflation-resistant yield.

• Equity / Growth: 4–6 positions focused on long-term capital appreciation.

• Energy / Specialty: 2–4 positions capturing tax advantages and real-asset exposure.

Each holding should represent roughly 4–6% of the total portfolio value — large enough to matter, small enough to withstand a setback.

Step 3: Reverse Engineer and Diversify by Vintage

Before deploying capital, define where you’re headed.
Start by reverse-engineering your wealth target:

If your goal is to have $600K actively working in private markets within five years, that might mean you’ll want:

• 12 positions at ~$50K each

• Roughly $125K per year

• 2-3 new positions per year

Want to go bigger? Double the position size and halve the timeline. The point is the system, not the size. Translate your goal into a monthly cadence and execute deliberately.

Now pace that plan across multiple years and market cycles so each vintage benefits from a unique environment — rate changes, valuation resets, and different macro conditions.

Time is the real asset. Vintage diversification smooths returns far better than sheer position count ever could.

Step 4: Compound through Focus

Once the structure is established, expansion no longer adds strength.
Reinvest distributions into proven operators, double down on assets showing durable performance, and simplify wherever complexity hides drag.

Focus turns time into an ally. It channels capital toward what’s working and accelerates compounding.

Step 5: Review the Stack Annually

Audit allocation, performance, and liquidity each year.

Go beyond price charts — measure cash-on-cash return, vintage diversification, and cross-strategy correlation.

As the stack matures, your perspective shifts. The question moves from how much to invest to where to redeploy returns.

That’s the transition from investor to allocator — the mark of a professional stack builder.

A well-built 12–24 stack tends to deliver:

• Steady income from credit and real estate.

• Long-term appreciation through equity and energy.

• Risk control through uncorrelated vintages and operator quality.

When the stack is in rhythm, you’ll feel it: fewer surprises, consistent cash flow, and clarity in every allocation decision.

Closing Thought

The 12–24 Rule™ builds what most investors chase: a portfolio that compounds on purpose.

Applying it transforms randomness into design and scattered investments into a compounding engine.

WEALTH REBELLION

“Concentration is the secret of strength.” - Ralph Waldo Emerson

The Rebellion Against Randomness

Over time, I learned what the best allocators already know:
diversification doesn’t protect wealth. Discipline does.
And the real skill isn’t spreading your bets thin; it’s structuring them.

Today, my portfolio looks like a strategy.
Twelve to twenty-four private holdings. Each deliberate. Each designed to compound.

Private markets trade on fundamentals, not fear.
Value is built, not quoted.
Returns come from execution, not emotion.

The 12–24 Rule™ gives your capital focus, rhythm, and resilience — the architecture of conviction.

Stack 12–24 high-conviction positions over five years.
Let time and cash flow do their work.

Wealth grows when focus replaces noise and conviction compounds without interruption.
Buy. Concentrate. Compound. Build.

That’s how we build wealth on purpose. One conviction at a time.

WHAT WE ARE READING

Hidden Risks of Overdiversification: When Less is More | CBRE Investment Management 

The Portfolio Secrets of Warren Buffett: 21.7% Annualized Returns Since 1965 

Intelligent Concentration: A Synopsis of Warren Buffett and Diversification

The Wealth-Limiting Risks Of Diversifying Too Soon – Redwoods, Bushes, and Pear Trees 

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