Portfolio Diversification
Portfolio diversification is the practice of spreading investments across various asset classes, industries, or geographic regions to reduce risk and improve potential returns. By holding a mix of assets that do not move in the same direction under similar market conditions, investors can reduce the impact of poor performance in any single investment. Diversification is a key strategy for managing investment risk and achieving more stable returns over time.
Example
An investor diversifies their portfolio by holding stocks in different sectors like technology, healthcare, and consumer goods, alongside bonds and international investments.
Key points
• Involves spreading investments across different asset classes and sectors.
• Reduces risk by minimizing the impact of any single investment’s poor performance.
• A fundamental strategy for managing risk and improving long-term returns.
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