Diversification

Personal Finance

Diversification is spreading investments across different assets so the failure of any one doesn't ruin your portfolio. The principle works because different assets (stocks, bonds, real estate, gold) often respond differently to the same economic event. A total US stock market index fund diversifies across 4,000+ companies, sectors, and capitalizations. A globally diversified portfolio adds international exposure. Beyond asset class, diversification spans time (dollar-cost averaging), geography, and currency. The trade-off: diversification reduces both downside risk and upside potential. The investor who put everything in Bitcoin in 2017 got rich but took catastrophic risk that diversification would have prevented.