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Diversification

Spreading your money across different investments to reduce the impact of any single failure.

What Diversification means

Diversification means owning a variety of investments so no single company, sector or asset can sink your whole portfolio. If one stock drops sharply, other holdings may hold steady or rise. For most people, broad index funds and exchange-traded funds (ETFs) are a simple way to diversify without picking individual companies. Diversification reduces risk; it never eliminates it, and it does not guarantee profits or prevent losses.

Example

A portfolio that holds one single tech stock could lose 40% in a bad year for that company. A diversified portfolio of 500 companies would rarely move that much in a single year.

Related terms

ETFIndex FundInflation

Disclaimer

Definitions are simplified for educational use and are not personalized financial, investment, tax or legal advice.

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Frequently asked questions

A portfolio that holds one single tech stock could lose 40% in a bad year for that company. A diversified portfolio of 500 companies would rarely move that much in a single year.

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