What is a diversified portfolio?

A diversified portfolio is built from complementary assets, such as stocks and bonds, that don’t usually perform the same way. If one part of a portfolio is declining in value, it can hopefully be offset by another part that’s rising.

What are the most valuable assets in a well diversified portfolio?

In a well-diversified portfolio, the most valuable assets are those that don't correlate with other assets. A mutual fund or index fund provides more diversification than an individual security does. It tracks a bundle of stocks, bonds, or commodities. It is not a replacement for a well-diversified portfolio.

How can I increase the level of diversification within a single portfolio?

Many of the methods below can be combined to enhance the level of diversification within a single portfolio. Fund managers and investors often diversify their investments across asset classes and determine what percentages of the portfolio to allocate to each. Each asset class has a different, unique set of risks and opportunities.

How many stocks should you invest in a diversified portfolio?

Studies and mathematical models have shown that maintaining a well-diversified portfolio of 25 to 30 stocks yields the most cost-effective level of risk reduction. Investing in more securities generates further diversification benefits, but it does so at a substantially diminishing rate of effectiveness.