Diversification

Quick Answer

Diversification is an investment strategy that spreads money across different assets to reduce risk by avoiding overexposure to any single investment.

Definition

Diversification is an investment strategy that spreads money across different assets to reduce risk by avoiding overexposure to any single investment.

Explanation

Proper diversification smooths returns over time and reduces portfolio volatility. Index funds and ETFs provide instant diversification. Over-diversification can dilute returns.

Example

A diversified portfolio: 60% stocks (US and international), 30% bonds, 10% real estate or REITs, rebalanced annually.

Frequently Asked Questions

What is Diversification?

Diversification is an investment strategy that spreads money across different assets to reduce risk by avoiding overexposure to any single investment.

How does Diversification work?

'Don't put all your eggs in one basket' — diversification reduces the impact of any single investment's poor performance. Diversification can be across asset classes (stocks, bonds, real estate), sectors, geographies, and investment styles.Proper diversification smooths returns over time and reduces portfolio volatility. Index funds and ETFs provide instant diversification. Over-diversification can dilute returns.

Can you give an example of Diversification?

A diversified portfolio: 60% stocks (US and international), 30% bonds, 10% real estate or REITs, rebalanced annually.

Free Excel Templates

Also try our free Asset Allocation Tracker template

Monitor your asset allocation across stocks, bonds, and other investments. Ensure your portfolio matches your target allocation and rebalance as needed.

Download Asset Allocation Tracker