Diversification
Spreading investments across assets to reduce risk.
What is Diversification?
Diversification is the practice of spreading investments across different asset classes, sectors, geographies, and securities to reduce the impact of any single investment's loss on the overall portfolio. The principle rests on the observation that assets with low or negative correlations do not move in lockstep — when one falls, others may hold steady or rise. Diversification does not eliminate market-wide (systematic) risk, but it can substantially reduce company-specific (unsystematic) risk.
Example
Example
An investor who holds only airline stocks is heavily exposed to fuel prices and travel demand. Adding bonds, technology stocks, and international equities reduces that concentration risk.