Diversification Definition

What is diversification?

Diversification is an investment strategy that involves spreading your money across a range of different investments. The aim of diversification is to reduce your overall risk by investing in a mix of assets that will not all move in the same direction.

For example, if you invest only in shares, then your investment will go up and down with the stock market. But if you also invest in property, bonds and cash, then your overall investment portfolio is less likely to be affected so much by any one particular asset class going up or down.

Why diversify?

There are two main reasons to diversify your investments:

1. To reduce risk: By investing in a mix of assets, you can protect yourself against big losses if any one particular asset class falls in value. For example, if shares go down, then property or other assets might go up and so offset some of the share losses. This helps to smooth out the ups and downs of investment returns over time, which can make it easier for investors to stick with their investment plan during difficult times.

2. To improve returns: While diversification does not guarantee higher returns, it can help to improve your overall returns by giving you exposure to a wider range of asset classes and opportunities. For example, if shares have done well recently then investing some money in property or other assets might provide better returns than investing solely in shares.