What diversification is, and why you should not put all your eggs in one basket
Diversifying means spreading your money across different assets so that a bad outcome in one of them does not drag down your entire wealth. The idea is not simply "holding a lot of things," but holding assets that do not all move exactly the same way in response to the same event.
Concentration risk
If all your savings are in the stock of the company you work for, a problem at that company hits you twice: you lose your job and the value of your investment at the same time. That is concentration risk in its most extreme form, but the same logic applies to betting everything on a single country, sector, or asset.
Levels of diversification
- By company: an index fund already diversifies you across hundreds or thousands of companies with a single purchase.
- By country/region: an MSCI World fund exposes you to more than 20 developed countries; adding emerging markets broadens the base even further.
- By asset class: combining equities with bonds, and in some cases gold or other assets, reduces overall volatility because they do not always fall at the same time (see our model portfolios).
Diversification doesn't remove risk, it transforms it
A well-diversified portfolio still carries market risk: if the global stock market falls, your portfolio falls. What diversification avoids is specific risk — a single company, sector, or country ruining your wealth — without giving up the expected long-term return of equities.
Try it yourself: use the compound interest calculator to simulate your case with your own numbers, see the charts and find your break-even point.
Common mistakes when "diversifying"
- Fake diversification: holding 10 funds that essentially track the same index diversifies nothing, it just makes tracking harder.
- Home bias: concentrating the portfolio in companies from your own country out of familiarity, ignoring that country's small weight in the world economy.
- Ignoring correlation: two assets that tend to rise and fall together (even under different names) provide less real diversification than it seems.
A single global index fund already solves most of the company and country diversification in one move — one of the reasons it's this site's default choice.