Allocation & Exposure
Diversification
Definition
The practice of spreading capital across assets geographies or sectors to reduce the impact of any single loss.
Diversification is the intentional distribution of capital across exposures that are not all expected to behave the same way under the same conditions.
Why it matters
It reduces the portfolio's dependence on any single outcome. But diversification only works if it is real not just apparent.
What most investors miss
The gap between what the term means and how it is usually applied.
They count the number of funds or accounts as a proxy for diversification. Real diversification is about uncorrelated exposures not quantity.
How to read it
Test diversification by asking what would fall together in a market stress event. Holdings that move together are not truly diversified.
Multi-account lens
How this term reads differently across brokers and accounts.
Apparent diversification is a common fragmented portfolio problem. Multiple accounts with different names can hold the same underlying exposures.
Related terms
Terms that connect to diversification.
Allocation
How the portfolio's capital is distributed across asset classes geographies sectors or individual positions.
Concentration
The degree to which a portfolio's capital or risk is clustered in a small number of positions sectors or geographies.
Sector Allocation
The distribution of the portfolio's capital across industry sectors such as technology healthcare energy or financials.
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