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.