What is portfolio diversification?

Risk is an inevitable part of investing, but you can manage the risks you take by diversifying.

Diversification is one of the most basic and popular investing strategies available to all manner of investors, from the most sophisticated hedge funds and pension funds to college grads opening their first 401(k)s.

The idea behind diversification is simple: Don’t put all of your eggs in one basket.

Instead of, say, betting your entire savings on the stock of a single, favorite company, you aim to own stocks of several companies in different industries and some other types of investments such as bonds.

Having a balanced mix protects you in case any particular investment you own has a bad year. “You never know which asset class is going to be in favor or out of favor for the year,” says Amy Arnott, a portfolio strategist at Morningstar in Chicago.

Source: Buy Side from Wall Street Journal, What is Portfolio Diversification? By Anna-Louise-Jackson, May 24, 2024