What is diversification?

Diversification: Spreading your money over many companies, countries and asset types. If one part disappoints it does not hit your whole wealth. It does not remove risk.

With diversification you do not put everything on one company or one country. You spread your money over many different investments. If one disappoints, it only hits a small part of your money.

You can spread over companies, sectors, countries and asset types, such as shares, bonds and savings. A broad index fund already gives a lot of spread in one purchase.

Diversification does not remove risk. When the whole market falls, most investments fall at the same time. It mainly protects against bad luck at one company.

Example
You have 10,000 euros in one share and it drops 50 percent. You lose 5,000 euros. If you split the same amount over 20 shares of 500 euros each and one drops 50 percent, you lose 250 euros.

Watch out
Owning many funds that all hold the same big companies gives less diversification than it seems.

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