Understanding Portfolio Diversification

Diversification is the practice of spreading capital across assets whose returns do not move in lockstep. The goal is not to maximise return in any single year, but to reduce the chance that one concentrated position determines your entire result.

Correlation matters more than count. Twenty technology stocks are far less diversified than a mix of global equities, government bonds and real assets, because the twenty positions tend to fall together during a sector drawdown.

Diversification reduces specific risk, not market risk. A broadly diversified portfolio can still decline substantially when entire markets reprice. Investment values can rise or fall, and past performance does not guarantee future results.