Trading glossary
Understand portfolio diversification, how spreading exposure across assets can reduce concentration risk, and why it does not eliminate market risk.
Portfolio diversification means spreading your capital across a range of assets rather than concentrating it in one. The reasoning is that different assets often respond differently to the same event, so a decline in one may be partly offset by others. By reducing reliance on any single holding, diversification aims to lower the concentration risk within a portfolio.
Diversification can occur across asset classes, sectors, geographies, or individual instruments. A portfolio might combine different crypto assets, equities, and other holdings that are not expected to move in perfect lockstep. The degree to which assets move together, called correlation, matters; combining assets with lower correlation tends to smooth overall results more than holding several similar ones.
Diversification can reduce certain risks but cannot remove them all. Broad market downturns can pull many assets down together, and no allocation guarantees a positive result. Diversification is a risk-management concept, not a promise of returns. This is educational information, not personalized financial advice; consider your own goals and the risk of losing capital.
No. Diversification aims to reduce concentration risk, but it cannot eliminate market risk. In broad downturns, many assets can fall together, and losses are still possible.
Correlation measures how closely two assets move together. Combining assets with lower correlation can reduce overall portfolio swings more effectively than holding several assets that tend to move the same way.
There is no fixed number. Effective diversification depends more on how differently the holdings behave than on a specific count, and it varies with each person's goals and situation.