What is diversification?
Diversification means spreading your money across many different investments, so a loss in one has a smaller effect on the whole. Owning many companies, industries, or types of assets lowers the risk that one bad result does lasting damage.
Why it helps
Single companies can fail or fall sharply for reasons no one saw coming. When you own many, the winners and losers tend to balance out, and the ups and downs of the whole portfolio are smaller.
Ways to diversify
Own many stocks instead of a few, spread across industries and countries, and hold different kinds of assets such as stocks and bonds. A broad index fund gives wide diversification in a single investment.
What it cannot do
Diversification lowers the risk tied to any single company, but it does not remove the risk of the whole market falling. In a broad downturn most stocks can fall together.
Frequently asked questions
How many stocks make a portfolio diversified?
There is no exact number. Spreading across many companies and industries matters more than hitting a specific count, and broad index funds hold hundreds or thousands.
Do famous investors diversify?
Some do and some do not. Many well known investors run concentrated portfolios on purpose, which you can see on their investor pages.