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  1. Knowledge
  2. ›Glossary
  3. ›Diversification

Risk

Diversification

Diversification means spreading wealth across different investments to reduce overall risk.

Diversification is the principle of spreading wealth across different asset classes, regions, sectors and individual securities. Combining assets with low correlation lowers overall risk without reducing expected returns in equal measure.

Harry Markowitz called diversification the "only free lunch" in finance. An MSCI World ETF holding over 1,500 securities offers broad diversification in a single instrument.

One caveat: diversification does not protect against systematic risk (market risk), only against security-specific risk. In a market crash, as a rule all stocks fall, regardless of how widely the portfolio is spread.

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Asset AllocationVolatilityRebalancing

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