What is Diversification?
Answer:
Diversification is an investment strategy


that aims to reduce overall risk by creating a portfolio that has diverse investments such as stocks, bonds, and real estate holdings. The theory behind diversification is that if one type of investment is falling, the others won’t be suffering severe losses.

Since different classes of assets move up and down independent of each other, your overall exposure to risk is limited. By diversifying, you are balancing out your exposure to risk. For example, if you had a diversified portfolio consisting of 30% stocks, 30% bonds, and 30% real estate, you could ride out real estate losses because the other 60% of your portfolio is invested in other instruments.

In addition to diversifying across different classes of investments, many investors diversify within each class. They may hold a diverse selection of stocks with companies representing different industries. This protects them when a hot industry goes cold – not all of their stocks will be affected by a downturn. For example, if an investor only invested in technical stocks and the technical industry as a whole begins to lose value, the portfolio would be dramatically affected. However, if the investor invested in a diverse range of stocks including technical companies, pharmaceuticals, and other industries, the portfolio will be better able to ride out a downturn in one particular industry.
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