What is Diversification?
Spreading investments across many assets to reduce overall risk.
Formal Definition
Diversification combines assets whose returns are imperfectly correlated so that idiosyncratic risks partly cancel, lowering portfolio volatility without a proportional cut in expected return. Because it targets stock-specific rather than market-wide risk, it reduces but cannot eliminate systematic risk, which is why diversified portfolios still fall in broad bear markets.
In Simple Terms
It is the classic idea of not putting all your eggs in one basket. By owning many different investments, one blowup hurts far less because the others are unlikely to fail at the same time.
Example
A portfolio holding 30 stocks across technology, health care, energy, and consumer staples is far less exposed to any single company than one holding just three tech names.