Diversification is the investment strategy of spreading money across different assets to reduce dependence on any single investment.
A diversified portfolio may combine shares from different companies, industries, countries, or company sizes. It may also include asset classes such as bonds, cash, real estate, or commodities. The purpose is not to eliminate risk, because broad market declines can affect many holdings at once. Instead, diversification can reduce company-specific or sector-specific risk when assets do not move identically.
The modern statistical foundation of portfolio diversification is associated with Harry Markowitz’s 1952 work on portfolio selection. His analysis showed that portfolio risk depends not only on each asset’s individual volatility but also on how the assets’ returns relate to one another.
Owning many investments does not automatically guarantee effective diversification. Several funds may hold the same large companies, creating hidden concentration. Diversification can also limit the benefit of a single exceptional investment. Investors generally balance its risk-reduction benefits against costs, complexity, and their goals.