- Diversification means buying enough different stocks so that you aren’t unintentionally placing big bets on things that provide risk without upside return.
- A diversified portfolio makes pure bets on the things you want (such as dividend stocks or healthcare stocks) while diluting out the things you don’t care about.
- You can break the rules of diversification if it’s done intentionally as part of your strategy.
It’s common for new investors to hear the financial pros say things like, “Make sure you have a well-diversified portfolio.”
What exactly do they mean?
Sometimes they mean you should have a healthy balance of stocks, bonds, cash, and other investments so you’re not taking on too much risk.
But in this article, we’re going to focus specifically on stock investing and how to diversify your stock portfolio.
What is Diversification?
Diversifying your portfolio involves buying enough different stocks so that you aren’t accidentally placing too big a bet on any one strategy or area.
Put simply, “Don’t put all your eggs in just one or two baskets.”
The goal of portfolio diversification is to reduce unnecessary risks that could interfere with your investing strategies and goals.