Diversification

Diversification is the practice of spreading your investments around so that your exposure to any one type of asset, sector, or strategy is limited. The goal is to maximize returns by investing in different areas that would each react differently to the same event.

• Asset Class Diversification: Don't just hold stocks. Mix in bonds, gold, real estate, or cash equivalents. Each class performs differently during various economic cycles.
• Strategy Diversification: Don't just use one trading method. Combine a trend-following strategy (which does well in strong markets) with an options income strategy (which does well in sideways markets).
• Sector Diversification: Within your stock portfolio, don't buy only IT companies. Mix in financials, healthcare, FMCG, and energy to avoid sector-specific downturns.

A common mistake is thinking you are diversified when you are not. Owning 10 different technology stocks is not diversification—if the tech sector crashes, all 10 will likely crash together. To be truly diversified, you must look for non-correlated assets: assets that move independently of one another.