Written by Diversification is the practice of spreading your investments across a variety of asset classes, sectors, and geographic regions to reduce risk. The basic principle is that different investments react differently to economic events, so if one investment performs poorly, others may perform well, helping to balance out your portfolio.
For example, a diversified portfolio might include stocks, bonds, real estate, and commodities. Within the stock portion, you might diversify further by investing in different sectors such as technology, healthcare, and energy. Diversification doesn’t eliminate risk entirely, but it helps to manage and reduce it. A well-diversified portfolio can protect against the volatility of individual investments and smooth out returns over time.
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