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Beginner · Lesson 5 of 8Diversification
Diversification means spreading money across many investments that do not all fall at the same time. One company can fail; a fund holding 300 companies is very unlikely to lose everything.
Diversify across companies, sectors (banks, miners, healthcare, technology), countries and asset types (shares, bonds, property, cash). The Australian market is heavy in banks and miners, so many Australians add global shares.
Diversification reduces company-specific risk but cannot remove market risk: in a global crash most shares fall together. That is why asset mix (how much in shares versus bonds and cash) matters most for how bumpy your ride will be.
Key takeaways
- Do not depend on one company, sector or country.
- Diversification removes company risk, not market risk.
- Asset mix drives most of a portfolio's ups and downs.
Check your understanding
1. What risk can diversification NOT remove?
- One company going bankrupt
- A single sector slump
- A broad market crash
- A CEO scandal
Show the answer
A broad market crash. Market-wide risk remains even in a diversified portfolio.
2. The ASX 200 is heavily weighted to which sectors?
- Technology and media
- Banks and miners
- Healthcare and utilities
- Retail and travel
Show the answer
Banks and miners. Financials and materials make up a large share of the ASX 200.
Go deeper
- Wikipedia: Diversification (finance)
- YouTube videos: diversification investing explained
- Investopedia: diversification
- Moneysmart (ASIC): diversification
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