Diversification
Diversification spreads exposure so that no single holding decides the outcome. Its effect shows up in how much a portfolio swings, rather than in its average return.
The mechanism is correlation. Holdings that move together do not offset each other, however many of them there are.
Pairs that historically move differently
- Stocks and bonds. Historically low correlation, though not reliably negative.
- US and international. Different economic cycles and currencies.
- Large cap and small cap. Different sensitivities to rates and growth.
Count is not the measure. Ten technology stocks are ten holdings and close to one exposure, since they respond to the same conditions. A single S&P 500 index fund holds 500 companies across 11 sectors.
This content is educational and informational only. It is not financial, investment, or tax advice. Consult a qualified professional before making financial decisions.