What is diversification in investing?

Diversification in investing means limiting your exposure to any one type of asset. A diversified portfolio may include securities from different industries or risk levels and help cushion the blow if one asset or group of assets loses value. The aim of a diversification strategy is to develop a portfolio that helps provide the investor with an appropriate degree of risk, depending on their risk appetite, time horizon, and goals. Clearly, portfolio investing involves decisions that may be unique to each investor.

As part of portfolio investing, it’s important to find the appropriate balance between conservative and aggressive. Portfolios that are too conservative or that include a disproportionate amount of lower-risk, lower-yield assets can be at risk of inflation outpacing returns. Conversely, an overly aggressive portfolio that’s heavily weighted with equities may be overly exposed to market volatility.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.


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