Quick definition

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Updated: Jan 20, 2023

Diversification is the practice of spreading out your financial investments across a variety of companies and assets.

Key details

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  • Diversification is an investment strategy that aims to minimise risk and maximise the opportunity for returns
  • It means putting your money into assets, such as stocks and bonds, that aren’t correlated, so they react to events in different ways
  • A portfolio of 30-40 stocks is regarded as the most cost-effective way to get the benefits of diversification

What is diversification?

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Diversification is a policy of managing risk in your investment portfolio. The idea is to own lots of different types of investment, in a variety of industries, so that you are protected against any one of them failing.

The point of diversification is based on the fact that the future is difficult to predict. Unforeseen events happen all the time, so an investment strategy that spreads your money out among assets that react to those events in different ways gives you a better chance of succeeding in the long run.

A good way to understand this is by considering investing in stocks compared to putting money into bonds. If all your money is in the stock market and the market crashes, you might lose a significant part of your investment. However, if you own a few stocks and a few bonds then it’s likely that one part of your portfolio will always be able to offset any fall in value from the other.

The same principle applies to different industries and countries as well. Diversification means creating a portfolio that includes a range of assets, in a variety of industries, from different places around the world. Studies have shown that, over time, you are more likely to make money by using this practice than from focusing your money in one area alone. 

Where can I learn more?

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One of the simplest ways to achieve the benefits of diversification is through an ETF, or exchange-traded fund. You can learn more about how to invest in one via our ETF hub. To learn more about investing in general, our stock market courses will take your through everything you need to know.

Sources & references
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James Knight
Editor of Education
James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.