What is Diversification?

GOLDSTONE LEARN

Different profit, Smarter profit. The works of our authors have appeared in the magazines of the whole world.

DEFINITION:

Diversification is a risk management strategy in which the investment portfolio is divided into different types of assets that behave differently if an asset or group of assets declines.

Understanding diversification

Diversification in finance is a method that attempts to protect an investment portfolio by reducing the risks associated with a single asset or group of assets. A diversified portfolio includes different types of assets that typically respond differently to the market. The positive performance of some assets should offset the negative performance of others. A diversified portfolio may include stocks of companies in a variety of industries and regions. It may also include a range of asset classes, such as stocks, bonds, cash, and real estate. How you diversify your assets depends on the risk you want to take, your financial goals, and how long you want to invest.

EXAMPLE

A balanced, diversified portfolio may have 35% in U.S. stocks, 40% in bonds, 10% in short-term investments, and 15% in foreign stocks. Equities may include both large-cap stocks (companies whose outstanding shares are valued at more than $10 billion) and small-cap stocks (companies whose outstanding shares are valued at $300 million to $2 billion). The portfolio may also be spread across different market sectors such as energy, technology and healthcare.

Takeaway

Diversification is like putting your eggs in different baskets…

Diversification is about owning assets that are not closely related or affected by the market in the same way. By dividing your assets, you limit your risk. So if one basket falls and breaks all the eggs in it, hopefully the eggs in the other baskets will remain intact.

Scroll to Top
Scroll to Top