What is Diversification?
Diversification is the practice of spreading investments across different assets, sectors, and strategies to reduce the impact of any single poor-performing investment on your overall portfolio.
Diversification Explained
Diversification is the only free lunch in investing. By holding uncorrelated assets, you can reduce portfolio volatility without necessarily reducing returns. However, over-diversification (diworsification) can dilute returns and make it hard to outperform. The right balance depends on your trading style, capital, and risk tolerance.
Real-World Example
Instead of putting your entire $50,000 in tech stocks, you allocate across tech (30%), healthcare (20%), financials (15%), consumer goods (15%), energy (10%), and bonds (10%). When tech has a bad month, your healthcare and consumer positions may hold steady, reducing overall portfolio losses.
Related Terms
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