What is risk diversification?
A strategy used by investors to manage risk. By spreading your money across different assets and sectors, the thinking is that if one area experiences turbulence, the others should balance it out. It's the opposite of placing all your eggs in one basket.
Key takeaways
-
Risk diversification is an investment strategy that spreads money across different assets and sectors to balance potential losses in turbulent areas.
-
While all investments carry some risk that cannot be completely avoided, diversification helps prevent overexposure to any single area.
-
Diversification extends beyond asset types to include varying company sizes, different sectors, and multiple geographic regions for comprehensive risk management.
-
Investors commonly employ this strategy during economic turbulence, spreading funds across stocks, bonds, and commodities to reduce market exposure.
-
Risk diversification also applies to business strategy, where companies expand into new products and sectors rather than specializing in one area.
Where have you heard about risk diversification?
The term often crops up during periods of economic turbulence, when there's a lot of uncertainty in financial markets. Rather than leaving themselves exposed to stock market swings, investors might look to spread their money across other assets like bonds and commodities too.
What you need to know about risk diversification.
All investments carry some degree of risk and, as a result, you can't avoid it completely. But the good news is that risk diversification can at least help you to avoid over-exposing yourself to one particular area.
Diversifying your investments doesn't simply mean spreading your money across different assets. Instead, you can also spread it between companies of varying sizes, different sectors, and a range of geographic regions.
Risk diversification can also be important in the business world. For example, rather than specialising in a single area, a company may choose to expand into new products and sectors.