Diversification means spreading investments across different holdings, markets or asset types rather than relying heavily on one outcome. It is a risk-management principle, not a guarantee against losses.
Why diversification can help
If a portfolio depends on a single company, sector or market, poor performance in that area can have a large effect on the whole portfolio. Spreading exposure can reduce that dependence.
Diversification is more than owning several investments
Ten holdings can still be highly concentrated if they are driven by the same economic factors. Diversification considers how exposures differ, including geography, sector, asset type and the sources of risk.
It does not eliminate losses
Different assets can fall at the same time, particularly during periods of broad market stress. Diversification can help manage risk, but it cannot make investing risk-free or guarantee positive returns.
Liquidity still matters
A diversified portfolio can still create problems if too much of it is difficult to sell. The ability to access money when needed should be considered alongside diversification.
High-risk exposure needs particular care
The FCA says higher-risk investments are suitable for a minority of consumers and provides a rule of thumb of limiting exposure to high-risk investments to 10% of net assets. That is general regulatory education, not a personal recommendation for any individual investor.