Diversification

What is diversification?

In investing diversification is simply having multiple assets within your portfolio. If you are invested into a mutual fund it takes care of diversification for you because a mutual fund is broken down into multiple assets all within one fund. I like to remind myself of diversification by the quote “don’t put all your eggs in one basket”. An example of putting all your eggs into one basket would be to invest all your money into one single stock. The reason you should consider not investing your entire portfolio into one stock is because it increases your risk. If that one stock fails and crashes by 50% then you just lost half of your portfolio. If you are well diversified your portfolio might consist of ten stocks or twenty stocks. If you are well diversified and one of your stocks drops by 50% your portfolio won’t suffer as much.

Why a diversified portfolio wins

“Experts recommend a diversified portfolio of low-index investments like index funds that track the market. Diversifying reduces the risk that the performance of a single company will affect your ability to reach your financial goals.” -Sam Becker (Acorns)

Acorns

Sam Becker