Let’s say you decide to invest $1,000 in stocks, and you invest it all in Tesla

If Tesla goes out of business, you’d lose all $1,000. 😱

A better option might be to invest it into 5 different companies: $200 into each one. 💸

This way, even if one of the companies fails, you won’t lose all your money.

This practice of spreading out your investments across different companies, industries, and asset classes is called diversification.

It's where the phrase "don't put all your eggs in one basket" comes from. 🪺

Diversification helps reduce your risk because if you own many different stocks across different industries, it's unlikely that all your stocks will perform poorly at the same time.

For example, imagine you only own tech stocks like Apple and Meta.

You’re taking on a lot of risk because if the tech industry faces a slump like it did in 2022, all your stocks might go down together. 👎

So, you could diversify your portfolio by buying some stocks in other industries, like healthcare.

It’s possible the tech industry’s slump doesn’t negatively affect healthcare stocks, so even if your tech stocks crash, your healthcare stocks may still be fine. 🫀

But diversification is not just about reducing risk or avoiding loss...

It can also give you a better shot at profits across different market conditions, allowing you to balance your reward over time. ⚖️

Let's look at a real world example:

From 2014 to 2021, tech stocks surged: Apple stock alone increased nearly 5x in those years.

But in 2022, tech stocks came crashing down: Meta dropped by nearly 70% on the year. 📉

However, healthcare stocks like Moderna surged due to the increased demand for COVID testing and vaccines.

If over the last 10 years you had diversified across healthcare and tech stocks, you could have rode the tech wave and reaped gains from 2014 - 2021…

While also gaining in 2022 from the healthcare rally. 😎

In the next lesson, you’ll learn about the easiest way you can diversify: ETFs. 🤫