Diversification definition

What is diversification?

Diversification is an investment strategy in which you spread your money over a range of different areas and asset types. The idea is that you’ll be better protected from risk because you won’t have all of your money invested in one thing. If you did, it would only take that one thing to fall in value for you to start losing money.

 

What’s the benefit of diversification? 

The main benefit of diversifying your investments is that it will help to manage some of your risk. The idea is that if you’re diversified across different sectors, geographic areas and assets, your money isn’t under the same pressures at all times. 

So, while one investment might be performing worse than you expected, another investment might be performing better – which helps to smooth out the effects of volatility on your overall investment returns. 

 

What are the most diversified investments? 

Some investments are more diversified than others by design. For example, a global shares fund like the one we offer gives you exposure to around 1,600 shares with a single investment – which is a more diversified investment than if you’re investing in the stocks of three different companies directly.

And, some funds are more diversified than others – a global shares fund will be more diverse than a tech fund for example, because your money will be spread over different sectors and companies, rather than just tech.

Learn more about stock market sectors

 

How to diversify your investments 

To diversify your investments, you’ll need to spread your money across a few different assets – like bonds, stocks and cash – and include different sectors and geographic regions. Some investors use the 60-40 method of diversification, in which they put 60% of their investments into stocks, and 40% into bonds.

But, this isn’t a hard-and-fast rule and you’ll need to carry out your own research before you invest to make sure that you’re investing your money into markets and assets that match your individual attitude to risk and reward.