Diversification
Diversification is spreading your money across different investments, such as many companies, industries, and types of assets, so that a loss in any single holding has a smaller effect on your overall portfolio.
By Beacon · Updated
How it works
Different investments don’t always rise and fall together. Conditions that hurt one industry or type of asset can leave another steady or even help it, so a mix tends to produce smoother results than a single holding. You can diversify across asset types, such as stocks, bonds, and cash, and within each type, for example by owning stocks of many companies in several industries.
Funds are a common shortcut, because one mutual fund or ETF can own small pieces of many securities. A fund focused on a single industry is still concentrated, though, and several funds can hold many of the same companies. Comparing each fund’s top holdings shows whether you are spreading risk or simply repeating it.
Diversification limits the damage any one investment can do, but it can’t prevent losses. In a broad market decline, many holdings can fall at the same time. Spreading money out also means you won’t capture the full gain of your single best performer. Its purpose is to keep one bad outcome from deciding the result.
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Sources and further reading
Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.