What is diversification?

We’ve all heard the expression “do not put all your eggs in one basket”. This saying is a perfect example of the principles of diversification. Diversification is the idea of spreading your money across different investments (stocks, bonds, real estate, etc.), preferably those with no/limited correlation. The idea here is that the overall stock market is volatile and filled with unexpected outcomes. Diversifying, or separating your eggs into different baskets ensures that in volatile economic times, your investments are not all acting in the same way. If you drop one of your baskets, you’ll still have other eggs to make an omelet- similarly, due to having a variety of investments, one of your underperforming securities won’t significantly impact your portfolio.