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Diversification


Diversification is an investment strategy that aims to minimize the overall risk of a portfolio. This is achieved by allocating a portfolio to several different assets. A well diversified portfolio will not have any individual investment representing a significant proportion of the entire portfolio. Additionally, many of the investments will have low or negative correlations to one another. Diversification is an effective way of hedging a given investment.

Diversification is generally considered a good practice for most investors. Although it will prevent a portfolio from achieving extremely high returns, it also mitigates the risk of significant losses. Over a long time horizon, a portfolio with lower variance will almost always outperform a portfolio with high variance. High variance in returns results in performance drag for a portfolio.