Diversification

Diversification means not putting all your money into one investment or asset type. By spreading across different companies, sectors, countries, or asset classes (shares, bonds, property, cash), you reduce the risk that any single bad outcome wipes out a large portion of your wealth. When one asset falls in value, others may hold steady or rise, smoothing out the overall performance of your portfolio over time.

You put all your savings into shares in a single UK retail company. That company goes bust and you lose everything. If instead you had spread the same money across a global index fund holding thousands of companies, one company failing would barely register in your overall balance.

Diversification reduces risk but does not eliminate it. A broadly diversified portfolio can still fall in value during a market-wide downturn. It is a risk management tool, not a guarantee.