Diversification
Not putting all your eggs in one basket is good advice for a reason — here’s exactly how much it actually protects you.
What Is It
Diversification means spreading your money across different companies, sectors, and asset types so that poor performance in any single one doesn’t wreck your whole portfolio. Owning one stock ties your entire outcome to one company’s fortunes; owning hundreds or thousands spreads that risk out.
Why It Matters
It’s the difference between a single company’s bad year costing you everything and costing you almost nothing. Broad index funds are one of the easiest ways to get instant, wide diversification without having to pick which specific stocks to own — an idea covered in more depth in Index Funds vs. Picking Stocks.
Quick Example
Own one stock that makes up your entire portfolio, and a 50% drop in that company costs you 50% of your money. Own a diversified fund of 500 companies where that same stock is just 0.2% of the fund, and the identical 50% drop costs you roughly 0.1% of your overall portfolio — the damage from one company’s bad year barely registers.
Try It Yourself
Diversification is about risk, not just growth — but the growth math still matters. See it modeled here.
📈Compound Interest Calculator
Model how a diversified portfolio grows over time, independent of any single holding’s performance.