Diversification

Diversification means spreading your money across many different investments. People do it to lower their risk.

You can spread money across types of investment, such as stocks, bonds and cash. You can also spread it inside one type, for example by owning many different stocks.

Different types and different industries often do well at different times. When one investment does badly, another may do well and make up for some of the loss.

Why it matters

If all your money is in one company, one bad year for that company hurts all of it. Spread across many companies, one bad result matters less. A fund pools money from many people and buys many investments at once, so it makes diversification easier. A fund that holds only one industry may still not be diversified.

A worked example

Mai has $1,000 to invest. If she puts it all in one company and its stock falls by half, she has $500 left. If she puts $100 in each of ten companies and one falls by half, she loses $50.