Diversification

Definition

In finance, diversification is a risk management strategy of combining a variety of 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.

Example

Instead of investing all your money in a single tech stock, you diversify by investing in a mix of stocks from different industries (tech, healthcare, consumer goods), bonds, and real estate. If the tech sector performs poorly, your losses are cushioned by potential gains in other sectors.