Diversification

(The weekly series - Pocket Money - where I explain financial basics in fewer than 200 words. Feel free to make suggestions!)

Diversification means that you spread your money across different types of investment so that your eggs are not all in one basket.

This might mean investing in different companies, different trades and sectors, different currencies, different economies or different asset types.

The idea is that if one investment does badly, then you haven't lost all of your money and in that way, it reduces risk.

So you could spend all of your money buying 100 shares in one company which is fantastic if they do super well and outperform every other company, but terrible if they go bust. If you buy one share each in 100 companies then you won't reap the same benefits if that one company beats all expectations, but that company going out of business won't lose all of your money.

This is exactly why ETFs, index funds and mutual funds are so popular.

You can also diversify by holding some of your money in cash - your emergency fund - before investing the rest. You can also introduce time diversification by investing smaller amounts consistently which is called pound cost averaging. 

You can't totally eliminate risk but this is a super way of reducing it significantly.

Love Eleanor. xxx