Glossary · Defined term
Diversification
Diversification means spreading investments across assets, sectors, or regions so no single holding dominates the outcome.
Last updated Oct 2, 2026
What it means
Diversification is the practice of spreading investments across different assets, sectors, regions, or strategies so that no single holding dominates the outcome. The goal is to reduce concentration risk: if one investment stumbles, others may hold steady or even gain. Diversification works best against risks unique to individual companies or industries, which economists call idiosyncratic risk. It cannot eliminate market-wide risk, since in a broad selloff most assets fall together. A diversified portfolio can still lose money; it simply avoids betting everything on one outcome.
An example
For illustration, an investor who puts everything into one airline stock is fully exposed to that company's fortunes. Splitting the money across airlines, healthcare, technology, and bonds means a bad quarter for one airline hurts far less. The portfolio still faces market-wide downturns, but the single-company risk is diluted.