Diversification
InvestingDefinition
Spreading your money across many different investments so a crash in any single one does not sink your whole portfolio. Called 'the only free lunch in finance' by economist Harry Markowitz because it reduces risk without reducing expected return.
The key is owning assets that do NOT move together. Stocks and bonds, US and international, growth and value. Owning 50 tech stocks does not diversify you, it just concentrates you in tech. True diversification shows up when assets zig while others zag.
The key is owning assets that do NOT move together. Stocks and bonds, US and international, growth and value. Owning 50 tech stocks does not diversify you, it just concentrates you in tech. True diversification shows up when assets zig while others zag.
Example
In 2008 the S&P 500 fell about 37%. A portfolio of 60% S&P 500 and 40% long-term Treasury bonds fell only about 14% because Treasuries rose as stocks fell. That is diversification earning its keep.
Related tool
Open the correlation tool on Arsenal.finance →