What Is Diversification

Diversification means dividing your investments among a variety of assets. Diversification helps to reduce risk because different investments rise and fall independent of each other. The combinations of these assets more often than not will cancel out each other’s fluctuations, therefore reducing risk. 

Unless you are a financial thrill-seeker or you have a deadly fear of losing it all, you may want to diversify your investments. Diversification is an effective way to help avoid losing money on a single bad investment. 

Historical analysis of those portfolios having different proportions of cash, bonds, stocks, and other assets reveals that, for a given return, there are optimal mixes of assets that produce different returns with minimal risk. These portfolios are considered to be “efficient” because they take the least amount of risk for a given return.

 Once you understand the personal factors that are important to building your investment portfolio, you can begin to choose from the investment choices that best fit your personal criteria. To select investments wisely, you should study how they work, how they interact with other investments, and how to use them to achieve your goals.

Diversification helps to reduce risk because different investments rise and fall independent of each other.There are many ways to diversify your investment portfolio. You can diversify across one type of asset classification—such as stocks. For example, you might purchase shares in the leading companies across many different (and unrelated) industries. Alternatively, you can diversify your portfolio across different types of assets such as stocks, bonds, and real estate, for example. You can also diversify on the basis of regional decisions such as state, region, or country. Simply stated, diversification in the stock market today  means “don’t put all your eggs into one basket.” 

The ultimate goal of diversification is to improve performance while reducing investment risks. A well-diversified portfolio spreads risks over a range of investments whose performances are not tied to the performance of the other assets in the portfolio.