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Investments often come in different shapes and packages, but many have similar content. Two seemingly different mutual funds can own the same stocks. In November 2010, for example, the core holdings of Fidelity Large-Cap Value (FSLVX) and Invesco Van Kampen Growth & Income (ACGKX) had several stocks in common.

There's nothing wrong with such portfolio overlap per se. However, you need know how much company-specific risk you have in your portfolio. You don't want your portfolio to be overly dependent on a few stocks. If you did, you wouldn't bother diversifying in the first place. Overlap flies in the face of diversification.

Here are some suggestions for how to make sure your portfolio is sufficiently diversified.

How to avoid overlap

If you're worried about duplication, remember these tips when building your portfolio.

1. Don't buy multiple funds run by the same manager. Zebras don't change their stripes, and managers rarely change their strategies. That's because fund managers have ingrained investment habits that they apply to every pool of money they run. So if you buy two funds by Famous Manager A, chances are you'll own two of the same thing.

2. Don't overload on one boutique's funds. Some fund families, such as Fidelity, T. Rowe Price and Vanguard, offer fund lineups that span a variety of investment styles. Other shops, called boutiques, prefer to specialize in a particular style. Janus made its name as a growth specialist; Oakmark means absolute value. Boutique families are often excellent at what they do, but it's questionable whether owning three of their funds gives you anything you won't get with one.

3. Go easy on the large-cap funds, especially if you own large-cap stocks directly. Large-cap stocks and funds make great core holdings, but they're perhaps the greatest source of overlap in many portfolios.

Why? The pool of large companies is relatively shallow. Only about 6% of all U.S. stocks can be classified as large cap. The remaining 94% qualify as mid- or small-cap stocks. So if you own multiple large-company funds, there's a high possibility of overlap. That's true if you hold individual large-cap stocks and large-cap funds, too.

4. Take the four-corners approach. Using the Morningstar style box can be a diversifier's best friend. The style box will not only tell you whether your manager is snapping up large-value stocks, but it also can lead you to funds that bear little resemblance to one another.

Value funds don't act much like growth portfolios, and small-cap funds behave differently from large-cap offerings. In style-box lingo, opposite corners attract. If you own a large-value fund from your favorite fund company, try one of its large-growth, small-value or small-growth offerings.

5. Manage your sector weightings. If two funds from the same category sport similar sector weightings, they may own many of the same stocks.

6. Determine how much overlap you might have. You've followed these tips and have put together a portfolio of investments or possible investments. To test for overlap, you could enter all of the investments -- both the stocks you've bought directly and every stock that your mutual funds own -- into a spreadsheet and sort by stock name. That's a lot of work. Morningstar.com offers a Portfolio X-Ray feature that can do this overlap analysis for you. (Note that Portfolio X-Ray is a feature available only to Morningstar.com Premium Members, but you can take advantage of a free 14-day trial.)

Using Morningstar.com's Portfolio X-Ray

Let's say you have $5,000 to invest for retirement. You plan to put about $1,000 in five different investments. You don't want more than 20% of your assets dedicated to any single security. You plan to buy Google (GOOG, news), Janus Twenty T (JAVLX), Legg Mason Capital Management Value Trust (LMVTX), Time Warner (TWX, news) and General Electric (GE, news).

Here's what you need to do to X-ray this possible portfolio for overlap on Morningstar.com:

1. Sign up for Morningstar.com's Premium Membership.
2. Click on Morningstar.com's Portfolio Manager.
3. Click on Create New Portfolio.
4. Name Your Portfolio.
5. Choose either a Watch List or a Transaction Portfolio. A Transaction Portfolio is far more precise than a Watch List Portfolio, and is the better choice overall, because it allows you to more effectively monitor your actual purchases over time. For this exercise, though, build a simpler Watch List Portfolio instead.
6. For each of your funds and stocks, enter the ticker and the amount of money you plan to invest or number of shares you plan to buy.
7. Click the Save Portfolio button at the bottom of the page.

Now it's time to X-ray. Click on the X-Ray tab and then click the Stock Intersection button. (The other buttons, X-Ray Details and X-Ray Interpreter, are different ways to examine how your portfolio fits together.)

The program examines each fund's top 50 holdings (a fund's 51st and succeeding holdings aren't likely to be significant stakes) and weights them according to how much you have invested in each fund.

So what did you find? Higher weightings in certain stocks than you said you wanted?

Remember, you wanted to limit your exposure to any one investment to 20% of your assets. Yet the X-Ray Report may inform you that you'd have more than 20% of your assets in some of your stocks because they could be dominant holdings in your two mutual fund choices, depending on how those funds are currently invested.