Diversification and asset allocation

Diversification is the practice of not putting all your money in one place. Asset allocation is the specific mix you choose across broad categories.

Why diversify

Different investments behave differently. When shares fall, bonds or gold may hold up. Spreading across many holdings means no single failure sinks your whole portfolio — "don't put all your eggs in one basket."

You can diversify across:

• Asset classes — shares, bonds, property, cash, commodities.
• Geographies — home country and international markets.
• Sectors and companies — technology, healthcare, banks, and so on.

Asset allocation drives results

Studies find that how you split money between shares and bonds explains most of a portfolio's long-term risk and return — more than picking individual winners. A common starting frame:

• More shares → higher growth, bigger swings (suited to long horizons).
• More bonds/cash → steadier, lower growth (suited to shorter horizons).

The easy way

A single index fund or multi-asset fund can hold thousands of securities across the world in one purchase. See ETFs and index funds.

Key takeaway

Diversification is the closest thing to a free lunch in investing: it lowers risk without necessarily lowering expected return.