#DiversifyYourAssets DEFINITION

Diversification is a strategy of investing in a wide variety of assets with different characteristics to reduce volatility.

What Is Diversification?

Diversification is a risk management strategy that creates a mix of various investments within a portfolio. A diversified portfolio contains a mix of distinct asset types and investment vehicles in an attempt to limit exposure to any single asset or risk.

The rationale behind this technique is that a portfolio constructed of different kinds of assets will, on average, yield higher long-term returns and lower the risk of any individual holding or security.

KEY TAKEAWAYS

Diversification is a strategy that mixes a wide variety of investments within a portfolio in an attempt to reduce portfolio risk.

Diversification is most often done by investing in different asset classes such as stocks, bonds, real estate, or cryptocurrency.

Diversification can also be achieved by purchasing investments in different countries, industries, sizes of companies, or term lengths for income-generating investments.

The quality of diversification in a portfolio is most often measured by analyzing the correlation coefficient of pairs of assets.

Investors can diversify on their own by investing in select investments or can hold diversified funds.

Understanding Diversification

Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks yields the most cost-effective level of risk reduction. Investing in more securities generates further diversification benefits, but it does so at a substantially diminishing rate of effectiveness.