Diversification — Never Put All Eggs in One Basket
Diversification means spreading your investments across different asset classes, sectors, and geographies to reduce risk.
What Happens Without Diversification
100% in one stock: if it drops 50%, you lose 50%. But 100% in 50 stocks: if one drops 50%, you lose only 1%. That is the power of diversification.
Layers of Diversification
Asset classes: Stocks + bonds + real estate + cash. Each behaves differently in market conditions.
Geography: Domestic + international. Different economies grow at different rates.
Sectors: Technology + healthcare + finance + consumer. Sector rotation protects you.
Time: Dollar cost averaging (investing over time) smooths entry prices.
The simplest diversified portfolio: one domestic index fund + one international index fund + one bond index fund. Three funds, complete diversification.