Diversification is the practice of spreading capital among different investments to reduce the potential risk of losing that capital in any given investment. Basically, it’s generally not a good idea to put all your eggs in one basket.
There are many ways to diversify your investments. For example, you can allocate your investment capital across different asset classes. Stocks, bonds, and cash tend to not move in sync with each other. So, factors that may cause one asset class to go up may cause another to go down. Diversification helps reduce the risk of the potential magnitude of loss in your portfolio that may follow exposure to any one asset class.
You can further diversify within asset classes by holding a number of different stocks or bonds, and investing in different industry sectors, such as retail, technology, and health care. If one industry does poorly, another may do well. On balance, your portfolio may still be net positive (or less negative).
If directly owning assets is not your thing, you are not alone. Many diversify their capital by owning mutual funds. A mutual fund is an investment company that pools capital from many investors and deploys it in stocks, bonds, and other financial products. Mutual funds make it easier for investors to own a small portion of many investments.
Of course, there’s lots to consider so if you need more information, click here.