The idea
If all your money sits in one stock and that company runs into trouble, your whole portfolio suffers. If it is spread across hundreds of companies, one failure barely registers. This is diversification: reducing the risk of any single investment ruining your results.
Ways to diversify
- Across companies: own many instead of one or two.
- Across sectors: technology, healthcare, energy and others do not always move together. See our sector pages.
- Across asset types: stocks, bonds, cash, and sometimes real estate or gold.
- Across regions: US and international markets.
- Across time: invest regularly rather than all at once. See dollar-cost averaging.
Asset allocation
Asset allocation is how you split your money between broad categories, mostly stocks and bonds. Stocks have historically offered higher long-term growth with larger drops; bonds are usually steadier but grow more slowly. A longer time before you need the money generally lets people hold more in stocks. The right mix depends on your goals, time horizon and comfort with risk.
What diversification cannot do
It does not guard against a falling market. In a broad sell-off, most stocks drop together. It also will not make you rich quickly, because owning many things averages out both the big winners and the big losers. And it is possible to own many funds that hold the same things, which is diversification in name only.
The easy route
A broad low-cost index fund or ETF holds hundreds or thousands of companies in one purchase. For many people it is the simplest, cheapest form of diversification. See what is an ETF.