Diversification
Spreading money across many investments that do not all move together, so that a loss on any one has a limited effect on the whole.
Diversification works because investments rarely all fall at the same time by the same amount. If you hold one company’s shares, your result depends entirely on that company. Hold a hundred companies across different industries and countries, and the specific setbacks of any one of them, such as a failed product or a fraud, are diluted by the others. The lower the correlation between the holdings, the stronger the effect. Diversification can also run across asset classes, such as shares, bonds and cash, which respond differently to economic conditions.
Diversification reduces the risk specific to individual companies, but it cannot remove market risk: in a broad crash most shares fall together, and correlations between assets often rise in a crisis, just when you want them low. It also means you will always own something that is doing badly, and you give up the chance of the spectacular return from a single big winner. Owning many funds is not the same as being diversified if they all hold the same large companies.
General education, not personal financial, tax or legal advice.
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