Portfolio Risk & Return

Diversification

Spreading money across holdings that do not all move together, so that a setback in one is cushioned by the others. Its power comes from correlation, not from the number of holdings: ten technology stocks are less diversified than three funds holding stocks, bonds and gold, because the ten tend to fall on the same days. Done well, diversification lowers a portfolio’s volatility and drawdowns without necessarily lowering its expected return, which is why it is often called the closest thing in investing to a free lunch. Its limit is that it cannot remove market-wide risk: when the whole market falls, most stocks fall with it.

Educational information, not investment advice. See it applied across the screener →