Diversification means spreading your money across different kinds of investments so that no single disappointment can derail your plans. It is often called the only free lunch in investing, because it can lower risk without lowering the return you can reasonably expect.

Why it works

Different assets react differently to the same news. When shares fall, high quality bonds often hold steady, and when inflation rises, real assets can help. Holding a mix smooths the ride, which makes it easier to stay invested through the bad years.

How to do it well

Spread across asset classes, regions and sectors, and keep costs low. Owning ten funds that hold the same companies is not diversification, so look beneath the labels. Rebalance once or twice a year to bring your mix back to its target.

Diversification will not prevent every loss. It is a way to make sure no single loss decides the outcome.