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The practice of spreading investments across various assets, sectors, and geographies to reduce overall portfolio risk.
Diversification is often called the "only free lunch in investing" because it can reduce risk without necessarily reducing expected returns. By holding assets that do not move in perfect lockstep (low correlation), the losses in one position can be offset by gains in another. Research suggests that most diversification benefits are achieved with 25-30 stocks across different sectors, though international diversification adds further benefit. However, diversification cannot eliminate systematic (market-wide) risk; it can only reduce unsystematic (company-specific) risk.