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Diversification — objective and limits. Diversification spreads exposure across many assets so that the idiosyncratic risk of any single holding has less effect on the whole portfolio. It reduces the likelihood that a single bankruptcy or sector collapse will devastate your net worth. Important nuance: diversification reduces unsystematic risk (company- or sector-specific), but it cannot remove systematic (market) risk — a broad market sell-off will generally hurt diversified portfolios too. The typical way for retail investors to diversify efficiently is to hold broad, low-cost funds (domestic equities, international equities, bonds) that already package many securities.

How to implement diversification sensibly. Think in layers: first, diversify across asset classes (stocks, bonds, cash), then within equities diversify by region and size, and within fixed income diversify by duration and credit quality. Rebalance periodically to maintain target weights because assets drift. Also consider correlation: the benefit of diversification comes from low or negative correlations among holdings — assets that move differently under the same economic conditions. Don’t confuse diversification with overcomplication; owning a few broad funds often achieves the same risk reduction as dozens of single-stock positions.

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