PORTFOLIO DIVERSIFICATION
Plain English
Diversification is the investment version of 'don't put all your eggs in one basket.' By spreading your money across different stocks, sectors, and asset classes, you reduce the impact of any single investment going wrong.
Going deeper
Diversification reduces unsystematic (company-specific) risk by holding a variety of investments. A well-diversified stock portfolio includes exposure to multiple sectors, market capitalizations, and geographic regions. However, diversification cannot eliminate systematic (market-wide) risk — when the whole market drops, most stocks drop. Research shows that about 20-30 individual stocks provide most of the diversification benefit. Over-diversification (100+ stocks) offers diminishing returns and makes it hard to outperform. Index funds and ETFs provide instant diversification across hundreds or thousands of stocks.
Examples
Concentrated vs. Diversified
Investor A puts 100% in tech stocks. When tech crashes 40%, their portfolio drops 40%. Investor B holds tech (30%), healthcare (20%), financials (20%), industrials (15%), utilities (15%). The same tech crash only costs them 12%.
False Diversification
You own Apple, Microsoft, Google, Amazon, and Meta — five different stocks, right? But they're all mega-cap tech and tend to move together. True diversification means different sectors and risk profiles, not just different company names.