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Diversification

In short

Spreading investments across assets to reduce risk — don't put all eggs in one basket

If you put all your money in one stock and it crashes, you lose everything. Spread it across 20 different stocks, sectors, and even countries — when one falls, others may rise, protecting your overall wealth.

Diversification reduces unsystematic (company-specific) risk by combining assets with low correlation. A well-diversified portfolio eliminates single-stock risk while retaining market returns. Modern Portfolio Theory shows diminishing returns to diversification beyond ~20-30 holdings.

Related concepts

  • Asset Allocation — Asset allocation is how you divide your money between different types of investments. A classic '60/40' portfolio is 60% stocks, 40% bonds. It's the most important decision in investing — determines most of your long-term returns and risk.
  • Portfolio — Your portfolio is everything you own as an investment — all your stocks, bonds, cash, ETFs, and crypto combined. Portfolio management is about how you combine these investments to meet your goals with acceptable risk.
  • Rebalancing — Rebalancing forces you to sell what's risen (expensive) and buy what's fallen (cheap) to restore your target mix. It's systematic discipline — the opposite of the emotional tendency to chase winners.