Diversification is a way to try to reduce risk by choosing a mix of investments. With a diversified portfolio, you spread your money across different types of investments.

Under normal market conditions, diversification is an effective way to balance risk and return. If you hold just 1 type of investment and it performs badly, you may lose everything. If you hold many types of investments, it’s much less likely that all of your investments will perform badly at the same time. The return you earn on the investments that perform well could offset some of the losses on those that perform poorly.

For example, fixed income investments and equities often move in opposite directions. When investors expect the economy to weaken and corporate profits to drop, stock prices will likely fall. When this happens, central banks may cut interest rates to reduce borrowing costs and stimulate spending. This causes bond prices to rise. If your portfolio includes both stocks and bonds, the increase in the value of bonds may help offset the decrease in the value of stocks.