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Diversification
Spreading money across different assets so no single failure can sink the portfolio.
Detailed explanation
Assets that do not move together offset each other's bad patches, which lowers portfolio volatility without necessarily lowering expected return. Owning twenty stocks from the same sector is not diversification — correlation, not count, is what matters.
Example
A portfolio of 60% equity, 30% debt and 10% gold typically falls far less in an equity crash than a 100% equity portfolio.
Why it matters
It is the only reliable free lunch in investing: less risk for the same expected return.
Key points
- Across asset classes first, then within each one.
- Correlations tend to rise in a crisis, reducing the benefit.
- Over-diversification just recreates the index at a higher cost.
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Educational content only. Definitions and examples are illustrative and are not investment, tax or legal advice.