Diversification

The idea is old and simple: if everything you own depends on the same thing going right, then one thing going wrong takes all of it. Holding a number of investments whose fortunes are not tied together means a bad outcome in one place does not decide the outcome overall.

Diversification is often described purely as a way of reducing risk, which understates what it actually does. Spreading money out also caps how much any single success can contribute. The reason people accept that trade is that concentrating requires being right about which one to concentrate in, and that is a much harder question than it appears in hindsight.

It is also easy to hold something that looks diversified and is not. Ten companies in the same industry, drawing revenue from the same customers, tend to move together when that industry does. What matters is whether the things you hold are exposed to the same events, not how many line items are on the screen.

This is one of the main reasons index funds and ETFs exist. A single purchase of a broad index fund buys a slice of hundreds of companies at once, which is a great deal more spread than most people would assemble by hand.