What is "diversification" in investing?

Diversification means spreading your money across many different investments, such as companies, industries, or asset types, rather than concentrating it all in one place. If one investment performs poorly, the losses are cushioned by others holding steady or gaining, reducing the risk that any single bad outcome wipes out your savings, even though you also won't get the full upside if one particular pick happens to soar.

Putting everything into one hot stock is the opposite strategy, maximizing reward but also the risk a single setback devastates your portfolio. Borrowing money to invest more, called leverage, increases both potential gains and losses, and doesn't itself reduce risk the way diversification does.

The eggs-in-one-basket idea long predates modern finance, but it was formalized mathematically in the mid-20th century into modern portfolio theory, showing how combining assets that don't move in lockstep can lower risk without necessarily lowering expected returns.