7 Private Equity Diversification Mistakes Accredited Investors Keep Making (And How to Fix Them)

Private equity has become a cornerstone of sophisticated portfolio construction. And for good reason: it offers access to growth opportunities, reduced public market correlation, and potentially outsized returns that traditional investments just can't match.

But here's the thing: having access to private equity doesn't automatically mean you're using it well.

I've seen plenty of accredited investors make the same diversification mistakes over and over again. They think they're building a bulletproof portfolio, but they're actually creating hidden concentrations and overlooked risks that only show up when markets get rough.

Let's break down the seven most common mistakes: and more importantly, how to fix them.

Mistake #1: Confusing Quantity With Quality

This one trips up even experienced investors. The logic seems sound: "If I own ten different private equity funds, I must be diversified, right?"

Not necessarily.

Simply owning multiple holdings doesn't guarantee diversification. You could hold a dozen PE funds and still be heavily concentrated in tech startups, late-stage buyouts, or a single geographic region. The number of funds in your portfolio tells you nothing about whether those funds actually move independently of each other.

The Fix: Start using correlation matrices and portfolio analytics to evaluate how your holdings actually relate to each other. Before adding any new position, ask yourself: "Does this genuinely reduce my overall risk, or am I just adding another bet on the same underlying factors?" True diversification means your investments respond differently to market conditions: not just that you have more of them.

Mistake #2: Overdiversifying Through Funds-of-Funds

Funds-of-funds sound like the perfect solution. One investment, instant diversification across multiple managers and strategies. What's not to love?

The problem is that many funds-of-funds end up producing results that mirror average private equity returns. When you spread capital across too many underlying funds, you dilute any potential for outperformance. Add in the extra layer of fees, and you're often paying premium prices for mediocre outcomes.

The Fix: If you're going the fund-of-funds route, look for managers who take a concentrated approach: typically four to seven carefully selected underlying funds rather than dozens. Or better yet, work with an advisor who can help you build a direct portfolio of PE investments tailored to your specific goals and risk tolerance.

Mistake #3: Ignoring Correlation Spikes During Crises

Here's something that doesn't show up in the marketing materials: private equity's reported returns often benefit from "smoothing bias." Because PE valuations aren't marked to market daily like public stocks, the numbers can look artificially stable.

This creates a dangerous illusion. Those low correlations you see in normal times? They can spike dramatically during market stress. When everything sells off at once, the diversification benefits you thought you had can evaporate exactly when you need them most.

The Fix: Don't rely solely on historical return distributions. Build in stress-testing and scenario analysis to understand how your portfolio might behave during a 2008-style crisis or a rapid interest rate shock. Assume correlations will rise during downturns and position accordingly.

Mistake #4: Mismatching Risk Tolerance and Risk Capacity

These two concepts sound similar but they're fundamentally different: and confusing them leads to poor investment decisions.

Risk tolerance is psychological. It's how much volatility you can stomach without panic-selling at the worst possible moment.

Risk capacity is financial. It's how much risk you can actually afford to take given your timeline, liquidity needs, and overall wealth.

Many accredited investors have high risk capacity (they can afford to lose money) but lower risk tolerance (they'll make emotional decisions when things go south). Others overestimate their capacity because they haven't properly accounted for upcoming liquidity needs.

The Fix: Before committing to any illiquid private equity investment, honestly assess both dimensions. Private equity locks up your capital for years. Make sure you have sufficient liquid reserves to cover emergencies, opportunities, and your own psychological comfort.

Mistake #5: Investing Without Understanding the Asset Class

Private equity isn't one thing: it's many things. Venture capital, growth equity, leveraged buyouts, distressed debt, real estate syndications, infrastructure... each has its own risk profile, return expectations, and market dynamics.

Too many investors jump into complex PE structures because they heard about a hot deal or a friend made money. They don't understand the underlying business model, the typical holding period, or what actually drives returns.

The Fix: Education before allocation. Take time to learn the specific characteristics of each PE sub-category you're considering. Understand the J-curve effect, how carried interest works, and what questions to ask managers. The more you know going in, the better decisions you'll make.

Mistake #6: Skipping Proper Due Diligence

In public markets, you have SEC filings, analyst coverage, and standardized reporting. Private markets? Not so much.

The regulatory environment is less stringent, information is harder to verify, and working with the wrong advisor or platform can lead you into trouble. Some investors treat PE due diligence like they're buying a mutual fund: a quick glance at past performance and they're in.

That's a recipe for disappointment.

The Fix: Dig deeper. Evaluate the track record of the specific team managing your money (not just the firm's overall numbers). Understand the fee structure completely. Review the legal documents with a professional. And verify that your advisor or platform has the expertise and alignment of interest to navigate these complex waters.

Mistake #7: Neglecting Liquidity Planning

Private equity is illiquid by design. Capital calls come when the manager needs them, not when it's convenient for you. Distributions happen on the manager's timeline. And secondary market sales: if available: often come at significant discounts.

Yet I constantly see investors over-allocate to PE without accounting for how this impacts their overall liquidity picture. They end up forced sellers in bad markets or unable to capitalize on attractive opportunities because their capital is locked up.

The Fix: Build a comprehensive liquidity model that accounts for expected capital calls, realistic distribution timelines, and potential delays. Most financial planners suggest keeping 12-24 months of expenses in highly liquid assets before making substantial PE commitments. Consider vintage year diversification as well: spreading commitments across multiple years smooths out cash flow volatility.

Bringing It All Together

Private equity can be a powerful tool for portfolio construction. It offers return potential and diversification benefits that are genuinely difficult to replicate in public markets. But those benefits only materialize if you approach PE with eyes wide open.

The investors who succeed in private equity share a few common traits: they understand what they own, they build portfolios based on genuine diversification rather than just accumulating holdings, and they match their PE exposure to their actual financial situation and timeline.

Avoiding these seven mistakes won't guarantee success: nothing does in investing. But it will dramatically improve your odds of building a private equity allocation that actually delivers on its promise.

At Mogul Strategies, we help accredited and institutional investors navigate these complexities. Whether you're building your first PE allocation or optimizing an existing portfolio, the key is having a framework that combines traditional assets with innovative strategies tailored to your specific goals.

The biggest mistake of all? Assuming that being accredited automatically means you're equipped. Smart investors know that access is just the beginning.