What Is Diversification? Meaning & Example
Definition
Diversification means spreading money across different investments so one poor performer does not sink your whole portfolio. It reduces risk but cannot eliminate it.
Related terms
Asset allocation is how you divide your portfolio among asset classes such as stocks, bonds and cash. It is one of the biggest drivers of both risk and long-term returns.
PortfolioA portfolio is the full collection of investments you own, such as stocks, bonds, funds and cash. Looking at it as a whole helps manage overall risk.
SectorA sector is a broad group of companies in similar lines of business, such as technology, healthcare or energy. Investors use sectors to compare companies and diversify.
What is Diversification?
Diversification means spreading money across different investments so one poor performer does not sink your whole portfolio. It reduces risk but cannot eliminate it.
Can you give an example of Diversification?
Owning funds covering many companies, sectors and countries is more diversified than owning three stocks.