Diversification is a widely used strategy for investors who want to minimize risk to a certain degree. Diversification simply means spreading your investments over different market vehicles. Just like your mother or grandmother who told you not to put all your eggs in one basket, Diversification is intelligently spreading your assets around in order to reduce risk. This in turn spreads your risk and if one industry gives you a loss, the other might make you profitable.
For example, investing $10,000 in the stock market in the technology sector is not diversification. Alternatively, investing 50% of that in the technology sector and the other 50% in the health care sector will diversify your portfolio, but not highly. A good example of a diversified portfolio is a Mutual Fund which usually takes your money, places 70% of it in stocks (different stocks/industries), 20% in other types of investments such as bonds, and the remaining 10% in cash. Another way to achieve Diversification is by spreading out investments around the globe. Many investors will keep the bulk of their assets in North America, but also invest in emerging markets like China, India and Brazil. That way, they are protected against big losses in any one market and can get exposure to quickly growing new markets. Finally, Diversification can be achieved by market capitalization(cap). Large cap stocks fill the majority of a portfolio while mid-cap stocks and small cap stocks make up the remainder. This way, a portfolio can enjoy the protection of having stocks of all different sizes.
Further diversification can be obtained by investing in stocks from different countries, and in different asset classes such as bonds, real estate, private equity, infrastructure and commodities such as heating oil or gold.
Since the mid-1970s, it has also been argued that geographic diversification would generate superior risk-adjusted returns for large institutional investors by reducing overall portfolio risk while capturing some of the higher rates of return offered by the emerging markets of Asia and Latin America.