Q&A: What does it mean that something is “diversified”?

Diversification is making something more varied or mixed. For example, a portfolio with 20 different stocks is more diversified than a portfolio that holds only 1.

The main benefit to having a diversified portfolio is decreasing risk. If I have all of my money invested in 1 stock and they go bankrupt, I would lose all of my money. But if I have all of my money in 20 stocks and 1 goes bankrupt, the other 19 companies should be able to pick up the slack.

Investing in a diversified basket of stocks is betting that the national/global economy as a whole will improve (which it has done since the beginning of time), not just one company.

Sports Analogy: Imagine owning a professional basketball team; would you want 15 centers on your team? Probably not. The same goes for a portfolio; having different holdings and different types of holdings makes the “team” better.

See also:
Blog: What I Believe to be the Best Investment Strategy

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