Diversification
Spreading investments across different asset classes to reduce risk—the 'don't put all your eggs in one basket' principle.
What You Need to Know
Diversification is the only free lunch in investing. By spreading money across different investments (stocks, bonds, real estate, etc.), you reduce the impact of any single investment failing.
Why It Works: When stocks crash, bonds often rise. When U.S. markets struggle, international markets might thrive. Diversification smooths out the volatility.
How to Diversify:
- Across asset classes: Stocks, bonds, real estate, commodities
- Across sectors: Tech, healthcare, energy, finance
- Across geographies: U.S., international, emerging markets
- Across company sizes: Large-cap, mid-cap, small-cap
Example Portfolio (Moderate Risk):
- 60% U.S. stocks (index funds)
- 20% International stocks
- 15% Bonds
- 5% Real estate (REITs)
Warning: Over-diversification is possible. Owning 50 individual stocks or 10 overlapping index funds provides no extra benefit.
Sources & References
This information is sourced from authoritative government and academic institutions:
- investor.gov
https://www.investor.gov/introduction-investing/investing-basics/glossary/diversification
Related Calculators & Tools
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Related Terms in Investment Analysis
Appreciation
The increase in an asset's value over time, whether it's real estate, stocks, or other investments.
Asset Class
A group of investments with similar behavior, risk, and regulatory profiles (e.g., stocks, bonds, cash).
Bond
A fixed-income investment where you loan money to a government or corporation in exchange for regular interest payments.
Bond Yield
The return an investor earns on a bond, expressed as a percentage, which can be calculated as current yield (annual interest ÷ current price) or yield to maturity (total return if held until maturity).
Capital Gains Tax
Tax on profits from selling investments like stocks, bonds, or real estate.
Capital Loss
A loss realized when you sell an investment for less than you paid for it, which can offset capital gains for tax purposes.