Diversification is the principle of spreading risk by allocating capital across different investments, asset classes, industries, regions, or strategies. The goal is to avoid concentration risk and reduce dependence on individual positions or markets.
If some investments perform poorly, others in the portfolio may partially or fully offset those losses. The effectiveness of diversification depends on the correlation between assets: the lower the correlation, the stronger the diversification benefit.
In wealth management, diversification is a fundamental principle of portfolio construction. It extends not only across asset classes, but also across currencies, maturities, issuers, and investment strategies.
A well-diversified structure can help smooth portfolio volatility and improve the predictability of returns.
