What is diversification?

You have $10,000. In the first plan you buy one stock with all of it. If that company has bad news and its stock falls 40%, you lose $4,000.

In the second plan you buy ten stocks from different industries, $1,000 each. If the same stock falls 40%, you lose $400 on it, and the other nine decide most of your result. Your account falls 4% from that one stock instead of 40%.

On JagSim's Research page, the sector and size picture shows how your holdings are spread: Free members see the totals, their largest industry and their largest holding, and Pro members see every industry and every holding. With $100,000 of virtual money you can practice building a portfolio across industries and see how much of it rides on a single holding.

Owning many stocks in one industry. Ten chip makers is closer to one bet than ten. Stocks in the same business tend to rise and fall together.

Owning funds that hold the same stocks. Two broad US index funds overlap heavily, so the second adds less spread than it seems.

Expecting it to stop a market-wide fall. In a broad sell-off most stocks fall together. Diversification lowers the risk of one company, not the risk of the whole market.

How many stocks do I need to be diversified?

There is no fixed number. Each stock you add from a different industry lowers the weight of any one company, and a broad index fund holds hundreds of companies in one share.

Does diversification mean I cannot lose money?

No. It makes one company's bad news hurt less. A diversified portfolio still falls when the whole market falls.

Is an index fund diversified?

A broad one is, across the companies in its index. It is still tied to one market, and if it weights by market cap, its largest companies count the most.

Can you be too diversified?

Holding many overlapping funds adds little and makes the portfolio harder to follow. Past a point, your result simply tracks the market, less any fees.