Diversification
Diversification means spreading your money across many different investments so that no single stock, sector, or country can sink your entire portfolio.
Why it matters
- Reduces the impact of any one investment performing badly.
- Smooths out returns over time compared with holding just a few stocks.
- Helps you stay invested during rough markets because losses tend to be less extreme.
Simple example
- Owning one stock = your results depend heavily on that single company.
- Owning an ETF with hundreds or thousands of stocks = any single company matters much less.
- Owning both stocks and bonds = bonds may soften the blow when stocks fall sharply.
Types of diversification
- By asset class: stocks, bonds, cash, sometimes real estate or other assets.
- By geography: domestic and international markets.
- By sector: technology, healthcare, financials, industrials, etc.
- Within funds: broad-market ETFs that hold many companies by design.