Finance glossary
Diversification
Also known as: Spreading risk
In simple terms
Diversification means not putting all your eggs in one basket — spreading your money across different investments so that one going wrong does less damage.
On this page
What does diversification mean?
Diversification is the practice of spreading your money across a range of investments — different companies, sectors, countries and asset types (such as shares, bonds and cash) — rather than concentrating it in one place.
The idea is that when some investments fall, others may hold steady or rise, smoothing out the overall ride.
How diversification works
Different investments do not all move the same way at the same time. By holding a mix, a poor result in one area is cushioned by others, reducing the chance of a single event wiping out a large part of your money.
Funds and index trackers are a simple way to diversify, because a single fund can hold hundreds or thousands of underlying investments.
How could this affect me?
Diversification cannot remove risk entirely, and in a broad market fall most things can drop together. But over time it reduces the chance that one bad investment does serious harm to your savings.
A portfolio heavily concentrated in one company or sector — including your own employer’s shares — is far more exposed to a single piece of bad news.
Things to watch out for
- Diversification reduces risk but never removes it — markets can fall broadly together.
- Holding lots of similar funds is not true diversification.
- Over-concentration in one company (including your employer) is a common, avoidable risk.
General information, not personal advice
Consumer Credit is an independent information service. We do not provide regulated financial advice or sell financial products. For advice on your own situation, speak to an appropriately authorised firm or a free service such as MoneyHelper. About Consumer Credit.
Sources
We checked this page against these official and authoritative sources.
- FCA, InvestSmart — understanding risk (opens in a new tab). Accessed 22 Aug 2026.