What is diversification?
As the popular saying goes ‘don’t put all your eggs in one basket’. Diversification is an investing strategy used to manage risk.
Instead of putting your hard-earned cash into a single place, be it a company, sector or asset class, by diversifying you can reduce the risk of a large, concentrated loss and instead spread it out among a number of different areas that can potentially lead to a better return.
While this method can reduce risk, no strategy is without its downsides. Most importantly, by playing it safe, you reduce the potential return you can receive. Similarly, the larger the number of investments you own, the more expensive and time-consuming it will be to keep an eye on them and deal with the transaction fees that come with each investment.