What Is Diversification?

The basic idea of diversification is that you shouldn’t keep all your eggs in one basket. Under normal market conditions, diversification is an effective way to mitigate possible risks by investing in a variety of assets and sectors, instead of betting it all on one area or company.

Indeed, there’s risk to any investment. If you hold only one investment and it performs badly, you could lose all of your money. Yet if you have a diversified portfolio with a variety of different investments, it’s much less likely that all of your investments will perform badly at the same time. Diversification lowers your portfolio risk because, no matter what the economy does, some investments are likely to benefit or at least perform better than the others. The profits you’ll earn on the investments that perform well will eventually offset the losses on those that perform poorly.

Tap Next to read more about the benefits and risks of diversification.