Project Description

Used in the investment management context, to diversify means to spread your investment over a variety of securities so that the positive gains of some, neutralize the negative performance of others.

In order for this balancing act to occur, the securities in your portfolio must not share material correlations.   Correlation, in finance, refers to the degree in which securities move in relation to each other. That is, they must be unlikely to move to the same extent in the same direction with fluctuations in the market. Generally speaking, holding a portfolio of 25-30 non-correlating securities would be considered an adequately diversified portfolio.

When you are just starting out, it may seem difficult to achieve diversification in your portfolio. This is especially true if you don’t have a large sum to invest. However, carefully selected exchange traded funds (ETFs) can help investors achieve diversity with the purchase of a single share. This is because many ETFs are made up a diverse basket of securities, and when you buy a share of the ETF, you are buying a slice of this diverse basket.