Module 6 of 11
Diversification & Why It Matters
Learn the only 'free lunch' in investing, spreading your risk across different investments.
Section 1 of 4
Don't Put All Your Eggs in One Basket
Diversification means spreading your money across different investments so that if one does badly, others might do well.
Why it matters:
Imagine investing everything in one company. If that company thrives, you do brilliantly. If it fails, you lose everything.
Now imagine investing across 500 companies. Some will fail, some will thrive. The failures hurt, but they're balanced by successes elsewhere. Your overall result is more stable and predictable.
Diversification doesn't guarantee profits or prevent all losses, but it reduces the impact of any single investment going wrong.
Diversification spreads risk so no single investment can devastate your portfolio.
Section 2 of 4
Types of Diversification
You can diversify across multiple dimensions:
By company: Own many different businesses, not just one or two.
By sector: Spread across technology, healthcare, consumer goods, energy, etc. Different sectors thrive in different economic conditions.
By geography: Invest in UK, US, Europe, Asia, and emerging markets. Don't bet everything on one country's economy.
By asset class: Mix shares, bonds, property, and cash. They respond differently to economic events.
By time: Invest regularly over time ("pound-cost averaging") rather than all at once.
A well-diversified portfolio might hold thousands of individual investments across all these dimensions, which is why funds are so useful.
Good diversification spreads across companies, sectors, regions, and asset classes.
Section 3 of 4
How Diversification Actually Works
The magic of diversification isn't just about averaging returns: it's about how investments move relative to each other.
Correlation: How closely two investments move together.
- Correlation of +1: Move exactly together
- Correlation of 0: Move independently
- Correlation of -1: Move opposite to each other
The sweet spot: Combining investments that aren't perfectly correlated smooths your overall returns.
Example: When stock markets crashed in 2008, government bonds rose in value. Investors who held both experienced smaller overall losses than those who held only shares.
This is why experts call diversification "the only free lunch in investing": you can potentially reduce risk without sacrificing expected returns.
Combining investments that don't move together smooths your returns over time.
Section 4 of 4
Practical Diversification
How much diversification do you need?
Research suggests that owning 20-30 different shares captures most of the diversification benefit. Beyond that, adding more doesn't help much.
But there's a catch: those 20-30 companies need to be in different sectors, regions, and sizes. 30 tech companies isn't diverse.
The easy solution: Use funds.
A single global equity fund might hold 1,500+ companies across dozens of countries and all major sectors. Combine it with a bond fund and you have a well-diversified portfolio with just two holdings.
This is what portfolio construction at Vegan Invest looks like: we build diversified portfolios from carefully screened funds, so you get both ethics and diversification.
Funds make diversification easy: one global fund can hold thousands of companies.
Ready to test yourself?
Take the quiz and keep your place
The app scores this module's quiz, saves your progress across all 11 modules and picks up where you left off on any device.