Diversification is the only free lunch in investing because it reduces risk without necessarily reducing returns.
Why Diversification Works
The mathematics of spreading risk.
Owning 500 stocks means one dropping 50% barely impacts your portfolio. Different assets respond differently to events. You are ensuring no single loser can destroy you.
Building a Diversified Portfolio
Asset classes, regions, and sectors.
Basic: Single global ETF like VWCE. Balanced: 70% stocks, 20% bonds, 10% alternatives. Advanced: Split across developed, emerging, European, bonds, real estate, gold. No single position over 5%.
Common Diversification Mistakes
When diversification goes wrong.
Diworsification with overlapping funds. Home bias with too much in one country. Ignoring correlation between similar assets. Over-diversifying into an expensive index fund. Not rebalancing.