Diversification
What is diversification?
Diversification means owning enough different investments that no single failure can decide your outcome. It reduces the damage of being wrong about any one company.
- Written by
- Suggested Investments Research Team
- Content type
- Reference definition
- Published
- 2026-09-13
- Last reviewed
- 2026-09-13
Count is not the same as spread
Twenty holdings in one sector are barely diversified. Concentration risk is measured by shared exposure — industry, customer, currency, regulation — not by the number of tickers.
It has a cost
Diversification also dilutes your best decisions. The point is not to eliminate risk but to make sure no single mistake is unrecoverable.
A worked example
A portfolio where one sector exceeds 40% of the value has a concentration issue worth addressing, usually with future contributions rather than by selling.
The mistake people make
Assuming an index fund plus several individual stocks in the same industry is diversified. Overlapping exposure often hides in plain sight.
How we use it
We flag sector concentration in research views, and we never present a portfolio allocation as a recommendation.
Related terms
Sources and methodology
- Investor.gov investor education — U.S. Securities and Exchange CommissionPrimary source
- Intelligent Accumulation methodology — Suggested InvestmentsPrimary source
Keep reading
- Investing Glossary
Every investing term we use, defined once and in plain English — from compounding and drawdown to Form 13F and share dilution.
- Compound interest
Compound interest is growth earned on both your original money and on the growth it has already produced. It is the reason long holding periods matter more th
- Dollar-cost averaging
Dollar-cost averaging means investing a fixed amount on a fixed schedule regardless of price. It removes the need to decide when to invest, and it buys more s
- Free cash flow
Free cash flow is the cash a business has left after paying the costs of running and maintaining itself. It is the cash that can fund dividends, buybacks, deb
- Expense ratio
An expense ratio is the annual percentage of your money a fund keeps to run itself. It is deducted from returns quietly, every year, whether the fund performs
- Maximum drawdown
Maximum drawdown is the largest peak-to-trough fall an investment has suffered over a period. It measures the worst stretch an investor would have had to sit
Educational information only. Nothing here is a recommendation to buy or sell any investment, and no research measurement removes the risk of loss.