Diversification
Also called: spreading risk, the haystack
Spreading money across many holdings so that no single failure can do serious damage.
Two risks are worth separating. Specific risk attaches to one company — a fraud, a lawsuit, a failed product — and can be almost entirely removed by owning many. Market risk affects everything at once and cannot be diversified away.
Specific risk is uncompensated: you are not paid extra for bearing it, because you could have removed it for nothing. That makes carrying it simply a worse deal for the same expected return.
Most of the benefit arrives faster than people expect. Going from one holding to a few dozen does the bulk of it.
Concentration hides in ordinary places — shares in your own employer, a single country, one sector, or a single property with borrowed money on it.
Words on this page
- Risk — The chance that an outcome is permanently worse than you needed it to be.
- Market — All the buyers and sellers of an asset together — nobody sets the price from above.
- Share — A small piece of ownership in a company, including a claim on its profits.
Related terms
Covered properly in Learn.