Diversifying an investment means dividing the total amount across several financial assets. So investing in multiple activities can lower your risk.
A financial investment has the following risk components:
The secret to creating a “low risk” portfolio, or rather, mitigating the risk of a portfolio, is therefore to diversify the components of the portfolio by increasing the number of financial assets it contains. These activities are not intended to have any interrelated performance.
The essence of this principle, described by the Nobel Laureate in Economics, Markowitz, is that non-correlating assets succeed in eliminating the risk defined as specific, i.e. the risk of the individual instrument. However, there is still a systemic risk that can’t be completely eliminated.
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