Portfolio · Investing Glossary
What Is Diversification?
Spreading investments across different assets to reduce overall risk.
The Full Definition
Diversification means spreading your investments across different companies, sectors, asset classes, and geographies so that a poor performance in one area doesn't devastate your entire portfolio. It's one of the few genuine "free lunches" in investing — by holding uncorrelated assets, you can reduce risk without proportionally reducing expected return. Over-concentration in a single stock, sector, or country is one of the most common wealth-destroying mistakes investors make.
Real-World Example
An investor with 100% of their portfolio in tech stocks saw enormous losses in 2022 when the sector dropped over 30%. An investor holding a diversified mix of sectors, bonds, and international stocks experienced a much smaller drawdown.
Related Terms
- Asset AllocationHow you divide your portfolio across stocks, bonds, cash, and other assets.
- CorrelationHow closely two investments move in relation to each other.
- RebalancingRestoring your portfolio to its target allocation after market movements.
- Concentration RiskThe added risk of having too much of a portfolio invested in a single stock, sector, or asset.