What is Diversification in Investing?

Diversification is a risk management strategy that involves spreading investments across different asset classes to minimize exposure to any single investment risk. This time-tested approach follows the principle of not putting “all your eggs in one basket,” protecting your portfolio from significant losses when one investment underperforms. Research shows that well-diversified portfolios can reduce unsystematic risk by up to 90% compared to single-asset investments, making it a cornerstone strategy employed by over 75% of professional fund managers.

Nobel laureate Harry Markowitz, who developed Modern Portfolio Theory, famously stated that “Diversification is the only free lunch in finance.”…