Diversification is about spreading one’s assets or interests widely, in an effort to avoid widespread loss or damage. Diversification can basically be summarized by the truism “don’t put all your eggs in one basket.” By putting one’s proverbial eggs in multiple baskets there is a greater chance that while some are damaged, others will survive. The opposite of diversification is concentration, as in “concentrating all eggs in one basket.” In the latter case, of course, if something happens to that one concentrated basket, the chances are that all the eggs will be damaged.
An advantageous aspect of diversification is that at some levels it requires relatively little analysis and sophistication. While other risk mitigation techniques may call for comprehensive data collection and the application of very complex mathematical algorithms, diversification can be implemented much more simply. The only trick is to ensure that one’s choices are indeed leading to diversification rather than concentration. The two are not always easy to distinguish. An often-quoted example in the world of financial risk management is the case of Texan banks lending heavily to local oil companies in the 1980s. The banks then decided to diversify their energy lending portfolios by engaging in lending to real estate companies in the region. When an economic downturn hit, it severely hurt the oil industry, but also undermined real estate values. Thus, the banks discovered, too late, that their portfolios were in practice far less diversified than they originally thought.
Some examples of Diversification:
Storing money or valuables in multiple locations
- Facilitating trade with multiple partners and suppliers
- Seeking a variety of partners
- Playing the field romantically
- Placing investment assets in a number of separate accounts
- Investing in a broad variety of assets
- Investing in different industries and geographies
- Having many children