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What is Diversification?
Spreading money across different assets so one loss does not sink the whole portfolio.
Diversification means spreading money across investments that do not all move together, so that no single loss can sink the portfolio. It has been called the only free lunch in finance.
True diversification depends on correlation, not on the number of holdings: ten technology stocks are one bet; stocks, bonds, gold and trend-following strategies are several.
Diversification reduces the swings of a portfolio and the depth of its drawdowns. Its cost is that you will always own something that is lagging.
Related terms
See Diversification applied to real markets — 30 markets, decades of data — in the Research Terminal.
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