Finance
How does diversification work?
Diversification works by spreading your money across many different investments, so that if one does badly, others can balance it out. The idea is simple: don't put all your eggs in one basket, and you reduce overall risk.
See it in motion.
Watch a 2-minute animated lesson that shows exactly how diversification works.
Step by step
- 1It spreads money across many investments.
- 2Losses in one area can be offset by gains in another.
- 3It lowers the risk of any single investment hurting you badly.
- 4Funds and ETFs make diversification easy for most people.
Frequently asked questions
- How does diversification reduce risk?
- By spreading money across investments, so a loss in one is cushioned by others that hold up or rise.
- What does 'don't put all your eggs in one basket' mean?
- Don't concentrate everything in one investment — if it fails, you lose everything.
- What's an easy way to diversify?
- Index funds and ETFs bundle many assets together, giving instant diversification in one purchase.