What is diversification?
Diversification is an investment strategy where you invest in different asset classes in order to lower your overall risk. By diversifying your portfolio, there is a lower risk of one single event or bad investment doing significant damage.
Where have you heard about diversification?
The news is full of companies 'diversifying their offering' by providing new products, new services or new platforms. The reasoning is the same, the more diverse your offering, the lower your risk.
What you need to know about diversification...
You can diversify your portfolio by investing in different asset classes, like bonds, funds, stocks, derivatives, as well as across various industries.
Here's an example of diversification and why it's important. Say you've invested in multiple car companies, as it's a sector that interests you and you're knowledgeable about it. If public transportation became free for all, that event would damage the car industry and potentially damage your entire portfolio. But if you've got investments in cars, planes, food and property, that event will not damage your portfolio to such a great degree.