MONEY / PRACTICAL GUIDE
Diversification in Investing: Uses and Limits
Learn how spreading exposure can reduce concentration risk without eliminating market losses.
The short answer: Diversification spreads money across investments whose outcomes may differ. It can reduce the damage from one company or sector, but it cannot guarantee a profit or prevent losses across a falling market.
Count exposures, not tickers
Several funds can hold the same large companies. Look through holdings, sectors, countries and asset types to find hidden concentration.
Diversification and allocation differ
Asset allocation divides money among broad asset classes. Diversification spreads exposure within and across them. Both depend on goals, time horizon and capacity for loss.
More is not automatically better
Adding a highly similar holding may add complexity without changing risk. Each position should have a clear role in the overall portfolio.
Revisit deliberately
Market moves can change weights. A written rebalancing rule helps prevent every price move from becoming an emotional decision.
Put it into practice
Try this: List the ten largest underlying holdings across your funds. Mark repeated companies, sectors and countries to reveal hidden concentration.
Sources and further reading
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Educational purpose: This guide provides general education. It does not provide personalised financial, investment, legal or tax advice.