Diversification — Financial Glossary
Definition: An investment strategy that spreads risk by allocating investments across different asset classes, sectors, and geographies.
What is diversification?
Diversification is the practice of spreading your investments across different asset classes (stocks, bonds, real estate), sectors (technology, healthcare, finance), and geographies (domestic, international) to reduce risk.
Why it matters
The idea is simple: don't put all your eggs in one basket. If one investment performs poorly, others may perform well, balancing out your overall returns. Diversification doesn't guarantee profits, but it helps manage risk.
How to diversify
- Index funds / ETFs: Instantly diversify across hundreds of stocks
- Asset allocation: Mix stocks, bonds, and cash based on your risk tolerance
- Geographic spread: Include both domestic and international investments
- Sector variety: Don't concentrate in one industry