Diversification is a strategy that involves spreading out your activities, investments, and other factors to reduce risk or get better results. In the context of investments, diversification involves investing your money not in a single investment, deposit, or shares of a single company, but in at least several different places. This limits financial risk by reducing dependence on a single risk factor.

How does diversification work?

Diversification is embodied in a portfolio composed of various types of assets, which is expected to generate higher long-term returns on average and reduce investment risk. Diversification aims to smooth out risky events in the portfolio—the positive results of some investments neutralize the negative results of others. The benefits of diversification are only possible if the securities in the portfolio are not perfectly correlated – they react differently, often in opposite ways, to market conditions.

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