Diversification

The simplest example of diversification is provided by the proverb "Don't put all your eggs in one basket".

Dropping the basket will break all the eggs. Placing each egg in a different basket is more diversified. There is more risk of losing one egg (assuming at least one basket has a higher probability of being dropped than the original basket), but less risk of losing all of them.

The goal of diversification is not necessarily to boost performance. It won't ensure gains or guarantee against losses. Diversification does, however, have the potential to improve returns for whatever level of risk we choose to target.

During the 2008–2009 bear market, many different types of investments lost value at the same time, but diversification still helped contain overall portfolio losses.