What is diversification?

Avoiding dependence on one investment

Diversification means spreading investment exposure rather than relying heavily on a single company, sector, country or asset type.

The idea is simple: different investments do not always rise and fall at exactly the same time or for the same reasons.

Different forms of diversification

A portfolio can diversify across:

• individual companies

• industry sectors

• countries and regions

• developed and emerging markets

• different asset types

A fund or ETF can make it easier to own many investments through one holding.

What diversification can do

Diversification can reduce concentration risk — the risk that one investment has an outsized effect on the whole portfolio.

For example, a portfolio of one company's shares depends heavily on that company's success. A broad fund spreads that exposure across many businesses.

What diversification cannot do

Diversification cannot eliminate market risk.

During major market falls, many assets can decline together. Diversification also does not guarantee a profit or protect against every type of loss.

Diversification in Shariah-compliant investing

A Shariah screen reduces the eligible investment universe by excluding certain companies and activities. Diversification therefore needs to be considered within the range of investments permitted by the relevant methodology.

This guide is general education, not personal financial advice.