Next video:
Loading the player...

Nearly everyone has heard the adage “don’t put all your eggs in one basket.” This, essentially, is the idea behind diversification.

With regard to investments, diversification means a portfolio of many, noncorrelated marketable securities. The object is to have securities that counterbalance one another, so when some of them fall in value, others increase or at least remain relatively unchanged. Thus, the overall portfolio value stays as even as possible. 

In business, diversification means having different lines of business or products. When one line does poorly, the other line does well, and overall revenue stays the same or grows.

Take the example of BH, Inc.  One division of BH is the high-end retail chain of department stores called Gold’s.  During a booming economy, Gold’s stores do very well.  But anticipating a downturn in the economy, BH created a chain of lower-end discount stores called P.H. General.  When the economy slips into a recession, P.H. General’s sales rise as customers seek lower priced goods.  Gold’s sales decline as consumers have less spending money to purchase high-end items.  The rise in P.H. General’s sales offset the decline in Gold’s, and BH has diversified its retail sales division.

Some analysts argue that diversification should be at the investor level, not at the company level.  Instead of being owned by BH, Inc., Gold and P.H. General could be separate companies.  If  investors wanted to diversify, they could own shares in each company. 


Related Articles
  1. Financial Advisor

    Concentrated Vs. Diversified Portfolios: Comparing the Pros and Cons

    Examine the relative advantages and disadvantages of utilizing either a concentrated or a diversified investment portfolio strategy.
  2. Investing

    Portfolio Diversification, Done Right

    Diversifying your portfolio by means of different securities and asset classes is an essential approach to lower the overall risk of a portfolio.
  3. 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.
  4. Insights

    How to Achieve Real Diversification in Your Portfolio

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

    The Pitfalls Of Diversification

    Diversifying may reduce risk, but what does that mean to your overall ROI? Find out here.
  6. Investing

    Why You Must Diversify to the Point of Discomfort

    Here's why diversifying your portfolio to the extreme is one of the best investment strategies around.
  7. Retirement

    Bear-Proof Your Retirement Portfolio

    Find out how to protect your assets so you can live out your dreams in style.
  8. Investing

    Diversification: The Oldest Investing Trick in the Book

    Diversification is just as relevant to your investments now as it was 400 years ago.
Hot Definitions
  1. Covariance

    A measure of the degree to which returns on two risky assets move in tandem. A positive covariance means that asset returns ...
  2. Liquid Asset

    An asset that can be converted into cash quickly and with minimal impact to the price received. Liquid assets are generally ...
  3. Nostro Account

    A bank account held in a foreign country by a domestic bank, denominated in the currency of that country. Nostro accounts ...
  4. Retirement Planning

    Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve ...
  5. Drawdown

    The peak-to-trough decline during a specific record period of an investment, fund or commodity. A drawdown is usually quoted ...
  6. Inverse Transaction

    A transaction that can cancel out a forward contract that has the same value date.
Trading Center