|'Diversification' is another word
for 'spreading your risk' or 'not putting all your eggs in one
How does it work?
If you bet at evens on the toss of a coin, half the time you'll
double your money and half the time you'll lose it. Your average
return is zero.
If you go out for a gambling evening and bet your
whole pot of £100 on the toss of one coin your average return is
still zero. But you are taking a high risk. Half the time you will
be home early and watching Coronation Street for entertainment.
This is a high risk strategy for an evening out.
A far better plan is to make 100 separate £1 bets.
Your average return is still zero. But you have greatly reduced
the odds of a catastrophic early return to the TV. And even if you
have a really bad first 100, maybe ending up with only £80, you
are still in the game.
The strategy of making 100 small bets instead of one
large bet is one of diversifying your risk, or diversification.
Applied to investment.....
..... you have to do more than find one single good investment:
you have to find a collection of investments of different sorts.
There's much more to be said if you want to get clever.
Luckily,you can safely leave this to Advanced Investing.
The collection of diverse investments you end up with
is called your 'investment portfolio'.