Lesson 3 of 5 · 5 min read
Diversification
Don't put all your eggs in one basket.
What is diversification?
By spreading your money across different companies, sectors and regions, you limit the impact if one position disappoints. If one company goes bankrupt, you lose a small piece — not everything.
More assets, and above all less correlated ones, lower risk without costing you return. Assets that move together barely help.
The classic example
Suppose you put everything in one stock and that company collapses (think Wirecard, or FTX in crypto). Then you lose everything. With 500 companies in an ETF, one bankruptcy is barely felt. Diversification is your insurance against bad luck.
Wirecard: from DAX darling to zero in days
When it turned out that €1.9 billion was missing from the balance sheet, the stock evaporated. Anyone who had everything in this 'safe' tech company lost almost everything — in an ETF it was a pinprick.
Spread on 3 levels
1) Companies (not 1 stock). 2) Sectors (not only tech). 3) Regions (not only the U.S.). A global ETF does all three automatically for you.
ETFs: diversification in 1 click
An ETF often bundles hundreds to thousands of stocks. With 1 purchase you buy a whole basket. Ideal for beginners — instant diversification without having to research 500 companies.
Too much diversification also exists
Following a hundred individual stocks is impossible and adds nothing extra. A few broad ETFs already give you global diversification without the stress. More than that is 'diworsification'.
Remember this
- Diversification lowers the risk of one bad position without sacrificing your return.
- Spread on 3 levels: companies, sectors and regions.
- One broad world ETF arranges all that diversification in a single purchase.
- Too many individual positions ('diworsification') adds nothing, only stress.
There is a quiz for this lesson
3 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
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