Diversification
Spreading money across different investments so no single failure can seriously damage you.
Diversification means holding assets that do not all move together — different companies, sectors, countries, and asset classes. When one part disappoints, others can offset it.
It is the one genuinely free improvement available to investors. Spreading holdings reduces the risk specific to any one company without necessarily reducing expected return.
What it cannot remove is market risk. A globally diversified portfolio still falls in a global downturn, because the risk being spread is company-specific rather than systemic.
True diversification also means spreading across time and currency. Investing gradually rather than all at once, and holding unhedged global assets alongside Australian ones, protects against a single bad entry point or a domestic currency shock.
Concentration risk in practice
Holding one company means a collapse wipes out your capital. Holding three hundred through an index fund means the same collapse costs a fraction of a percent.
The bit people get wrong
Australian investors are often far less diversified than they believe. A portfolio of local shares plus an Australian property plus super invested largely domestically is three bets on the same economy.
Common questions
How many shares do I need to be diversified?
Research suggests much company-specific risk is removed somewhere between twenty and thirty holdings, though a broad index fund achieves it in a single trade.
Can I be over-diversified?
Holding many overlapping funds adds cost and complexity without adding real spread. The aim is genuinely different exposures, not simply more line items.
Does diversification protect against a crash?
It cushions but does not prevent losses. In severe downturns most asset classes fall together, which is why time horizon matters as much as spread.