Portfolio Diversification

Revised by Ricardo Ribeiro

What if...

You put all your money in one stock... 

and it crashes?

Better to spread your money among several stocks.

Never too much of anything

Great, but...

In a market crash...

all stocks might fall together.

So... also spread your money among different "classes".

For example: stocks, bonds, etc.

I Can Explain

It is not that complicated.

When we mix an asset class that tends to Zig...

With one that tents to Zag...

The combination fluctuates a lot less.

Diversification is the only free lunch in finance.

Harry Markowitz 

Nobel Laureate in Economics and father of Modern Portfolio Theory 

I See...

It is better when the assets and asset classes in my investment portfolio tend to move differently.

Yes, exactly.

Although, sometimes everything moves together...

You are better off with a balanced portfolio.

  • Don't buy too much of any individual asset
  • Don't buy too much of any asset class
  •  Mix assets and asset classes that tend to move differently

One Last Thing

Please make sure to check our Investing for Beginners guide. It contains a lot of useful information about how to create an investment portfolio that works.

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