01
Asset Classes
Spread exposure across categories such as stocks, bonds and cash based on financial goals, time horizon and risk tolerance.
ASSET ALLOCATION
SMART INVESTING
Diversification in Investing Build a More Balanced Portfolio
Diversification is a portfolio strategy that spreads money across different investments, asset classes, industries and markets. Learn how diversification can help reduce dependence on a single source of risk while supporting a long-term investment strategy.
01
Asset Classes
02
Industries
03
Markets
PORTFOLIO DIVERSIFICATION
PORTFOLIO MIX
BALANCED EXPOSURE
Different sources of risk
Balanced
UNDERSTANDING DIVERSIFICATION
Spread your investments across different sources of risk
A diversified portfolio does not depend entirely on one company, industry, investment type or market. Instead, it combines investments with different characteristics and risk drivers.
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What does diversification mean?
Diversification means spreading investments across multiple opportunities instead of placing too much of a portfolio in one investment or one type of market exposure.
For example, a portfolio could contain stocks from different industries, bonds with different characteristics, cash reserves and investments with exposure to different geographic markets.
The goal is not to eliminate investment risk. Rather, diversification can reduce the effect that one investment, sector or market event has on the overall portfolio.
Diversification is about exposure, not just quantity
Owning many investments does not automatically create diversification if those investments behave similarly.
PORTFOLIO DESIGN
Different investments can provide different sources of exposure.
WAYS TO DIVERSIFY
Diversification can happen across multiple dimensions
Investors can diversify in several ways. Looking beyond the number of holdings can help identify where a portfolio may have overlapping or concentrated exposure.
02
Companies
Holding securities from different businesses can reduce dependence on the performance of any single company.
COMPANY EXPOSURE03
Industries and Sectors
Exposure across different industries can help avoid excessive reliance on one sector or economic theme.
SECTOR DIVERSIFICATION04
Geographic Markets
Exposure to different regions can reduce dependence on one country's economic and market conditions.
GLOBAL EXPOSURE
RISK DISTRIBUTION
PORTFOLIO APPROACH
Reduce dependence on a single outcome
WHY DIVERSIFICATION MATTERS
One portfolio can have multiple sources of return
Financial markets do not always move in the same direction. Different investments may respond differently to changes in interest rates, economic growth, inflation, company earnings and market sentiment.
A portfolio that combines different types of exposure may therefore respond differently from one concentrated in a single investment or sector.
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Reduce dependence on individual holdings
02
Spread exposure across different industries
03
Balance investments with different characteristics
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Reduce the impact of a single market event
PORTFOLIO CONSTRUCTION
Different investments can play different roles
Diversification should not mean collecting investments randomly. Each part of a portfolio can have a specific role based on the investor's objectives, time horizon and risk preferences.
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Growth
Growth-oriented investments may provide long-term appreciation, although their prices can fluctuate significantly over shorter periods.
02
Income
Income-producing investments may contribute interest, dividends or other cash flows to a portfolio.
03
Stability
Cash and other lower-volatility holdings may provide liquidity and support short-term financial needs.
04
Balance
Combining different characteristics can create a portfolio that is less dependent on one particular market outcome.
PORTFOLIO REVIEW
Look at the complete portfolio, not individual investments alone.
BUILDING A DIVERSIFIED PORTFOLIO
Start with your goals, then consider your allocation
Diversification works best when it supports a clear investment objective. The right portfolio mix depends on factors such as financial goals, time horizon, risk tolerance and liquidity needs.
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Define Your Objective
Identify what you want the portfolio to accomplish.
02
Consider Your Time Horizon
Different time horizons can support different portfolio allocations.
03
Assess Risk Tolerance
Understand how much market volatility you can reasonably accept.
04
Review the Portfolio
Market movements can change portfolio weights and create unintended concentration.
COMMON DIVERSIFICATION MISTAKES
More investments do not always mean better diversification
A portfolio can contain many securities and still have significant concentration. Understanding common mistakes can make diversification more intentional.
Owning Too Many Similar Funds
Different mutual funds or ETFs can hold many of the same companies, creating more overlap than expected.
Ignoring Sector Overlap
Several investments may appear different while still depending heavily on the same industry or economic trend.
Adding Investments Without a Purpose
Adding more asset classes simply to increase the number of holdings can make a portfolio harder to understand without improving its structure.
Forgetting to Rebalance
Strong performance in one area can gradually change your intended allocation and increase concentration.
DIVERSIFICATION VS CONCENTRATION
Understand where your portfolio depends most
Diversification and concentration represent different approaches to portfolio exposure. Reviewing both can help identify where investment risk is coming from.
Diversified Portfolio
Exposure is spread across multiple investments or risk drivers. A single holding or sector generally has less influence on the entire portfolio.
- Multiple investment exposures
- Different sectors or industries
- Potentially lower concentration
- Broader portfolio structure
Concentrated Portfolio
A significant portion of the portfolio depends on one investment, company, sector, market or other specific source of exposure.
- Greater dependence on selected holdings
- Potential sector concentration
- Greater impact from specific events
- Higher exposure to concentration risk
RELATED INVESTMENT TOPICS
Explore more about investment risk
Diversification connects with several other investment risks. Understanding these risks can help you evaluate a portfolio more clearly.
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COMMON QUESTIONS
Diversification explained
Diversification is a strategy of spreading investments across different assets, companies, sectors, geographic markets or other exposures to reduce dependence on one source of risk or return.
No. Diversification cannot eliminate market losses or guarantee positive returns. It is intended to reduce the impact that a particular investment or risk factor can have on the overall portfolio.
There is no universal number. Effective diversification depends on how investments differ and whether they have overlapping exposures, rather than simply the number of securities held.
Investors can diversify across asset classes, companies, industries, sectors, geographic markets and other sources of portfolio exposure.
Many mutual funds and ETFs hold multiple securities and can provide diversification within the fund. However, investors should review holdings because different funds can have significant overlap.
Market movements can cause some investments to become a larger or smaller part of a portfolio than originally intended. Reviewing allocations can help identify unintended changes in portfolio risk.
BUILD A CLEARER INVESTMENT STRATEGY
Understand how diversification can support your portfolio
Explore GrowthSmartly resources covering investing, bonds, retirement planning, portfolio construction and investment risk.