What is diversification?
Diversification is the attempt to spread out risk by allocating assets into several different classes of investments such as equities, fixed income, cash and cash equivalents, etc. Diversification within a particular asset class attempts to limit losses. For example, if one stock in your portfolio of twenty different stocks drastically loses value, it will theoretically affect you less than if you had only invested in just that one stock.
Diversification is the selection of multiple investments within a portfolio. For example, investing in a portfolio of 30 stocks rather than in just a few. By maintaining a diversified, varied portfolio, you are minimizing risk. True, youre less likely to make that “big killing.” At the same time, when individual investments take nose-dive, you wont take a big hit.
