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Diversification
Definition
Diversification is an investment strategy that spreads money across different assets to reduce risk by avoiding overexposure to any single investment.
Explanation
'Don't put all your eggs in one basket' — diversification reduces the impact of any single investment's poor performance. Diversification can be across asset classes (stocks, bonds, real estate), sectors, geographies, and investment styles.
Proper diversification smooths returns over time and reduces portfolio volatility. Index funds and ETFs provide instant diversification. Over-diversification can dilute returns.
Example
A diversified portfolio: 60% stocks (US and international), 30% bonds, 10% real estate or REITs, rebalanced annually.