By MoneySense Editors on June 17, 2022

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By MoneySense Editors on June 17, 2022

What is diversification? Why do you need to know this definition? The MoneySense Glossary is your resource for learning and understanding financial terms.

Diversification is a strategy for reducing risk that involves holding a portfolio of investments that perform well under different and varying conditions. This reduces the investor’s vulnerability to losses, because poor performance by any single security, asset class, industry or other factor will usually be offset by strong performance in another. For example, investing in just one sector or one type of investment is the proverbial idea of putting all your eggs in one basket: If that basket drops, all the eggs will break, but if you put the eggs in various baskets, then you’ll always have some eggs left intact.

Example: “The classic investment book A Random Walk Down Wall Street illustrates the concept of portfolio diversification by describing how the owner of a beach resort might reduce the risk of rainy weather by investing in an umbrella company.”

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Do you have too many shares in one company?
Anyone who has a single stock that makes up more than 5% to 10% of their investment portfolio should be considering if they are overexposed and how to best diversify. We share some options.
The importance of diversification
After paying debts and saving cash investing is the next logical step, but Bruce Sellery says don’t risk it all on a single stock.
Smooth out your performance
Diversification can lower your portfolio’s volatility and increase your returns over time.