Diversification
dy-ver-sih-fih-KAY-shun
/daɪˌvɜːrsɪfɪˈkeɪʃən/
A strategy of investing in a variety of assets to reduce overall risk.
Diversification aims to reduce 'unsystematic risk' (risk specific to an individual asset) by ensuring that poor performance in one area is offset by better performance in others.
The story behind the word. The word 'diversification' comes from the Latin 'diversus', meaning 'turned in different directions, various', combined with 'facere', meaning 'to make'. So, it literally means 'to make various' or 'to turn in different directions'. In the financial context, this means spreading investments across various types and sectors to protect against risk, embodying the idea of turning away from a single, concentrated risk.
Word relationships
- Variety: General term for a range of different things; 'diversification' is the act of creating variety in investments.
- Spread: Refers to distributing something widely; 'diversification' is the strategic act of spreading investments.
- Concentration: Investing heavily in a small number of assets, increasing specific risk.
Commonly confused with
- Hedging: 'Diversification' spreads risk broadly; 'hedging' uses specific instruments to offset particular risks.
Word family
- Diversify (verb): To make or become more varied.
- Diverse (adjective): Showing a great deal of variety.
Collocations
- portfolio diversification
- asset diversification
- geographic diversification
Example sentences
- "Financial advisors consistently recommend diversification to minimize portfolio risk." Investment advice
- "True diversification involves investing across different asset classes, industries, and geographic regions." Portfolio management
- "The company pursued diversification into new markets to reduce its reliance on a single product line." Business strategy
Memory hook
Think of 'diversification' as making your investments 'diverse' – having a wide 'variety' to reduce risk. Diverse variety
When not to use
Do not confuse 'diversification' with 'hedging', which is a more targeted risk reduction strategy.
Fun facts
- The concept of diversification is often summarized by the adage: 'Don't put all your eggs in one basket.'
Related words
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