GLOSSARY // General Investing
Diversification
Diversification is spreading a portfolio across enough different holdings that no single position, sector, or country can sink it. Its power comes from imperfect correlation: assets that do not move together smooth each other's swings, cutting portfolio volatility without cutting expected return proportionally.
The math has a knee in the curve. Going from 1 stock to 20-30 stocks across different sectors eliminates most company-specific (idiosyncratic) risk; going from 30 to 300 adds little. What no amount of stock-picking diversifies away is market risk, the tendency of everything to fall together in a crash, which is why real diversification eventually means other asset classes, not just more tickers.
Portfolio A holds one stock at 100%. Portfolio B holds 20 equal 5% positions. The same company blows up and drops 60%: Portfolio A is down 60% and needs a 150% gain to recover; Portfolio B is down 3% and recovers with an ordinary month. The cost of that insurance is that when one holding triples, B only gains 10% from it. Diversification trades lottery tickets for survival.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.