In plain words: A risk management strategy that mixes a wide variety of investments within a portfolio.
Diversification is the idea of not putting all your eggs in one basket. By spreading capital across many holdings, a portfolio becomes less dependent on the fortunes of any single one, which can smooth out the bumps along the way.
How does diversification reduce risk?
Different investments rarely rise and fall at the same time. When one part of an portfolio struggles, another may hold steady or gain, softening the overall swing. This blending does not erase risk, but it can reduce the impact of any one disappointment.
What does a diversified mix look like?
Diversification works best across broad asset classes rather than within a single one. A spread that combines global equities, bonds, and cash, for instance, tends to behave more steadily than equities alone. Choosing those weights thoughtfully is the work of how a portfolio is built.
Key takeaways
- Diversification spreads capital across many investments to manage risk.
- Mixing asset classes can soften the impact of any single setback.
- It reduces, but never fully removes, the risk of investing.