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Finance Glossary

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Diversification

Definition:

Gravity causes baskets to fall. And when they fall, the stuff in there breaks. So why would you put all of your breakable stuff in just one basket?

Diversification mitigates risk: if one stock crashes, you still have a few dozen more that are hanging in. And diversification means more than just having a range of stocks. It can push you to have a range of investment categories, like bonds, real estate, commodities, non-U.S. assets, and so on.

Example

You buy some stock in technology companies (like Apple) and some bonds from your state government. You also give the kid down the street a seed loan of $20 for his lemonade stand. Then you buy some gold blocks and put them in the bank. That’s diversification. Even if the stocks tank, you still have other investments that can make you money.

Pro tip: maybe give the kid down the street your recipe for decent lemonade.