Definition - What does Diversification mean?

Diversification, in the context of insurance, is a risk management strategy wherein loss exposures are spread across a variety of areas, markets, or products. This technique recommends that to lower risks, a company or an individual should make different types of investments within a portfolio.

Insuranceopedia explains Diversification

The well-known aphorism says, "Don’t put all your eggs in one basket," and this is the philosophy behind diversification. It suggests that a person should spread their risk among various investments so that a loss in one can be offset by a return in another.

A common example of diversification is investing in a combination of real estate, bonds, stocks, mutual funds, and treasury bills, instead of investing in just one of the three. By having a diverse portfolio, the investor does not have to worry as much about one of the investments’ negative performance as the other investments’ good performance can make up for a possible loss. Before investing, it is best to consider risks, charges, expenses, and investment objectives.

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