Definition of Diversification

Diversification is the act of spreading investments amongst different assets, companies and sectors. The idea behind this is to reduce risk. If one investment fails, the investor will only lose a proportion of their money rather than all of it if they had invested solely in that asset.

Diversification is used for many different investing theories, one of the main ones being investing in large amounts of higher-risk assets, with the intention that the high payoff from those which succeed will outweigh the losses from those which fail.

A good investment portfolio should always be diversified as it reduces risk (diversifiable risk) and allows the investor to gain exposure to multiple sectors.