← Glossary
Diversification
Spreading money across many different investments so that one failure does little damage.
A holding's effect on a portfolio is its weight times its move. If one company is 5% of your portfolio and falls 60%, the portfolio loses 3%; if it is all you own, you lose 60%.
Diversification works best across holdings that do not fall for the same reasons — different industries, countries and asset classes. It cannot remove market risk: when the whole market falls, a diversified stock portfolio falls too.