The simple investing rule to help minimise big losses
Written and accurate as at: Dec 11, 2025 Current Stats & Facts
When it comes to investing, advice (both good and bad) is never in short supply. But there’s one piece of advice that most investors can get behind, and that’s don’t put all your eggs in one basket.
This simple idea – known as diversification – has become a cornerstone of smart investing. And for newcomers in particular, it’s a great way to navigate the ups and downs of the market without losing your cool. Below, we explore what diversification is and how you can incorporate it into your portfolio.
What is diversification?
Picking winning stocks can be extremely difficult, and for every person who got lucky and made millions betting on a single company, there are many more who lost everything investing in companies whose fortunes weren’t so rosy.
Mismanagement, global shocks, competition from more innovative upstarts — all companies are vulnerable to these. And if the one you’ve invested the bulk of your money in fails to fend them off, it could be devastating for your portfolio.
Diversification is an antidote to this. Instead of investing in a single company or a handful of similar ones, you spread your investments across a wide range of companies, industries, asset types, and even countries. The idea is to construct a portfolio that isn’t dependent on the success of any one investment in particular.
How mixing up your portfolio can reduce risk
One of the biggest advantages of a well diversified portfolio is its ability to withstand shocks: if one investment goes down, the others will hopefully hold steady or even increase in value, helping to balance out the loss.
A key concept at play here is correlation, which is a measure of how different assets move in relation to one another. If your portfolio has low correlation, it means it’s stacked with investments whose prices tend to move in different directions. On the other hand, if your portfolio has high correlation, it means your investments will be impacted in similar ways by certain market conditions.
Shares and bonds are a classic example of assets with low correlation. When share prices fall, bond prices often go up as investors flock to what they consider a safer home for their money. Owning both can give you peace of mind, as the dips in one may be offset by the peaks in the other.
Unlocking more growth opportunities
When you invest in a variety of assets, you give yourself a chance to capitalise on growth opportunities wherever they may arise.
Imagine two investors – Chris and Layla. When constructing his portfolio, Chris only sees fit to invest in Australian companies, particularly in the sectors he’s most familiar with. Layla, on the other hand casts a wide net, and invests in companies and industries across the globe, including in emerging markets.
Because Chris' focus is so narrow, his portfolio rises and falls with the fortunes of just a few industries in a single economy. And no matter how savvy a stock picker he is, local developments like elections and interest rate changes can have an outsized impact on his portfolio’s performance.
Meanwhile, Layla has built a portfolio that isn’t tied to the fate of any single market. Her holdings across multiple countries and sectors reduce the influence of local shocks and give her access to a much wider range of growth opportunities – opportunities that Chris will most likely miss.
Ways to build a diversified portfolio
So how do you actually construct a diversified portfolio? Here are a few common strategies to consider:
- Across asset classes: this is when you invest in a variety of financial instruments, like shares, bonds, property and cash.
- Across sectors: within an asset class like shares, you can diversify further by spreading your investments over different sectors.
- Across geographies: different countries and regions perform differently at various points in the economic cycle. By looking beyond the Australian market, you can get exposure to growth opportunities around the world.
By putting all these layers together, you can build a resilient portfolio that aligns with your risk tolerance and helps you move toward your long-term goals.