Diversification is a risk management strategy that involves investing across or within asset classes to reduce the overall risk of an investment portfolio.

One of the most important foundational principles of investing is to ensure that you have a diversified portfolio.

Conventional saying – “Don’t put all eggs in a basket.”

One should ensure that the capital is spread amongst different stocks and sectors so that it is not dependent upon a single stock for all returns and helps offset the ups and downs of the market.

As markets are volatile & unpredictable, diversification does not guarantee to entirely mitigate losing probability but it can help the investor to minimize this probability and one can avoid creating unwanted risk to his / her capital.

Some of the benefits of diversification

Key advantages of diversification include:

If a portfolio is well-diversified; one investment performs poorly over a certain period, other investments may perform better over the same period and if something goes wrong with one stock, it only accounts for a small proportion of your investments and therefore won’t be too detrimental to your overall wealth, thus reducing the potential losses.