What is portfolio diversification?
Portfolio diversification spreads holdings across assets, issuers and markets to reduce concentration risk, but cannot remove all losses.
How it works
1. Single-name risk Spreading holdings reduces dependence on one issuer; many stocks in one industry can still be concentrated. 2. Correlation How holdings move together matters, and those relationships can change during stress. 3. Asset allocation Weights across stocks, bonds and cash depend on horizon and risk capacity; no universal allocation fits all. 4. Rebalancing Market moves change weights. Periodic review can restore targets, with possible costs and taxes.
Practice and limits
5. Residual risk Market-wide declines, inflation and illiquidity can affect many holdings at once. 6. Costs and overlap Funds can simplify diversification but fees and overlapping exposures need review. 7. Hidden concentration Several funds can own the same large stocks. Employment and investments in one sector can compound exposure; inspect underlying assets.