Diversification

Category: business

The practice of spreading investments across different assets, sectors, and geographic regions to reduce systemic risk.

Diversification is the only "free lunch" in finance. By holding assets that are not perfectly correlated (e.g., when tech stocks fall, gold or bonds might rise), the portfolio’s overall volatility is reduced. Effective diversification requires more than just owning ten different tech stocks.

Common Examples

• True diversification requires exposure to uncorrelated asset classes, such as blending public equities with private real estate and commodities.
• Over-concentration in a single sector, even within blue-chip stocks, leaves the portfolio vulnerable to broad sector-specific policy shifts.