Diversification
Spreading capital across uncorrelated assets to reduce risk. When one position falls, others cushion the blow.
Diversification is the practice of spreading investments across different assets, sectors, geographies, or asset classes to reduce exposure to any single risk factor.
The core insight is correlation: if two assets always move together, holding both provides no risk reduction — you just own the same risk twice. True diversification requires assets whose returns are uncorrelated or negatively correlated.
There are limits. Diversification eliminates unsystematic risk (company-specific or sector-specific risk) but cannot eliminate systematic risk (market-wide risk). In a broad crash, correlations spike and diversified portfolios still fall — just less than concentrated ones.
Related Terms
Asset Allocation
How you divide your portfolio across asset classes — stocks, bonds, cash, alternatives — to balance risk and return.
BeginnerIndex
A benchmark measuring the performance of a selected group of securities — the S&P 500 tracks 500 large US companies.
BeginnerPortfolio
The complete collection of investments you hold — stocks, bonds, cash, and other assets together.
BeginnerSector
A broad grouping of companies with similar business activities. The S&P 500 uses 11 GICS sectors such as Technology, Financials, and Energy.
Beginner