What Is Diversification?

Diversification means dividing your investments among a variety of assets. Diversification helps to reduce risk because different investments rise and fall independent of each other. The combinations of these assets more often than not will cancel out each other's fluctuations, therefore reducing risk.

There are many ways to diversify your investment portfolio. You can diversify across one type of asset classification—such as stocks. For example, you might purchase shares in the leading companies across many different (and unrelated) industries. Alternatively, you can diversify your portfolio across different types of assets such as stocks, bonds, and real estate, for example. You can also diversify on the basis of regional decisions such as state, region, or country. Simply stated, diversification means "don't put all your eggs into one basket."

The ultimate goal of diversification is to improve performance while reducing investment risks. A well-diversified portfolio spreads risks over a range of investments whose performances are not tied to the performance of the other assets in the portfolio.

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