1. Risk and Diversification: Introduction
  2. Risk and Diversification: What Is Risk?
  3. Risk and Diversification: Different Types of Risk
  4. Risk and Diversification: The Risk-Reward Tradeoff
  5. Risk and Diversification: Diversifying Your Portfolio
  6. Risk and Diversification: Conclusion

The most basic – and effective – strategy for minimizing risk is diversification. A well-diversified portfolio consists of different types of securities from diverse industries, with varying degrees of risk. While most investment professionals agree that diversification can’t guarantee against a loss, it is the most important component to helping you reach your long-range financial goals, while minimizing your risk. (For more, see: 5 Tips for Diversifying Your Portfolio.)

Am I sufficiently diversified?

There are several ways to ensure you are adequately diversified, including: 

  1. Spread your portfolio among many different investment vehicles – including cash, stocks, bonds, mutual funds, ETFs and other funds. Look for assets whose returns haven’t historically moved in the same direction and to the same degree. That way, if part of your portfolio is declining, the rest may still be growing. (See also: Bond Basics.)
  2. Stay diversified within each type of investment. Include securities that vary by sector, industry, region and market capitalization. It’s also a good idea to mix styles too, such as growth, income and value. The same goes for bonds: consider varying maturities, credit qualities and durations.
  3. Include securities that vary in risk. You're not restricted to picking only blue-chip stocks. In fact, the opposite is true. Picking different investments with different rates of return will ensure that large gains offset losses in other areas.

Keep in mind that portfolio diversification is not a one-time task. Plan on performing regular “check-ups” or rebalancing to make sure your portfolio has a risk level that’s consistent with your financial strategy and goals. In many cases, for example, investors will taper off riskier investments and stack up on “safe” investments after they retire. (For related reading, see: The Importance of Diversification.)


Risk and Diversification: Conclusion
Related Articles
  1. Investing

    Introduction to Investment Diversification

    Reducing risk and increasing returns in your portfolio is all about finding the right balance.
  2. Investing

    The Dangers Of Over-Diversifying Your Portfolio

    If you over-diversify your portfolio, you might not lose much, but you won't gain much either. Find out how to maintain a well-balanced set of investments.
  3. Insights

    How to Achieve Real Diversification in Your Portfolio

    Sometimes traditional asset allocation and diversification aren't enough to grow your investments.
  4. Investing

    Avoid These Portfolio Diversification Mistakes

    When diversifying a portfolio investors should avoid these common pitfalls.
  5. Investing

    3 Reasons Successful Investors Do Not Practice Diversification

    Discover why many of the most successful investors do not bother to create a diversified investment portfolio.
  6. Investing

    6 Types of Diversification for Your Portfolio

    Here are six forms of diversification you should include in your portfolio.
  7. Managing Wealth

    Why and How to Diversify Beyond Asset Class

    Diversification is a must for investment portfolios but it isn't enough. Investors have to have different exposures within asset classes.
  8. Investing

    How to Diversify Your Portfolio Beyond Stocks

    Find out how to get diversified in asset classes beyond stocks to reduce portfolio risk. Learn how diversification can help you reach your financial goals.
  9. Investing

    What Does Investment Diversification Really Mean?

    A properly diversified portfolio provides investors with a way to reduce risk and volatility, without necessarily giving up returns.
  10. Investing

    When Geographic Diversification Fails

    Geographic diversification is becoming an ineffective investing strategy, but there are others that pay off in the long term.
Frequently Asked Questions
  1. What Licenses Do Financial Advisors Need to Have?

    Understand why all financial advisors are required to be licensed, and identify the specific licenses that must be obtained ...
  2. When Is Managerial Accounting Appropriate?

    Understand the difference between managerial accounting and financial accounting. Learn common scenarios in which managerial ...
  3. Do ETFs Generate Capital Gains for Shareholders?

    Learn how exchange-traded funds (ETFs) can generate taxable capital gains for shareholders due to occasional and substantial ...
  4. Why is there a negative correlation between quantity demanded and price?

    Learn what the law of demand is, the basic assumption of the law of demand and why there is a negative correlation between ...
Trading Center