Jasmine Birtles
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What is diversification? Everyday examples without technical jargon
Michele Lucato
20th Oct 2025
Even novice investors may have encountered an unusual term: diversification. This is a very popular investment strategy used by professionals and designed to limit the risk level of an investment portfolio while still generating profits.
Creating a well-diversified portfolio is not easy. For those who do not want to give up on it but lack the necessary skills, they can rely on industry professionals. Thanks to innovative technologies, these professionals can help clients invest in a stocks and shares ISA account, for example.
Below, we will explore this topic in detail and look at some daily examples.
- What does “diversify” mean?
- Why diversification reduces risk
- Simple examples of diversification
- How to get the best out of diversification
What does “diversify” mean?
The term “diversify” literally means to make something different or varied. When applied to investment management, this principle involves creating portfolios composed by assets that differ significantly from one to another in several aspects. More specifically, investors who rely on this strategy can apply it by diversifying:
- the type of asset class: depending on the situation, they may opt to split their capital between shares, bonds, mutual fund units, real assets, ETFs, cryptocurrencies and so on;
- sectors: diversification can be achieved by adopting economic sectors that are very different from each other, from technology to real estate;
- geographical area: investors can opt for assets from different countries;
- timeframe: the duration of the investment can also help to diversify the portfolio.
The main purpose of diversification is to control risk, which is balanced without sacrificing profit margins.
Why diversification reduces risk
Every investment carries risks, which are not always the same, but differ in type and level depending on several factors, from market stability to issuer stability.
Considering this, professionals use diversification to balance the portfolio in order to avoid, for example, all investments losing value at the same time or all having high levels of risk.
Simple examples of diversification
The number of possible examples of diversification is quite endless.
One among others could be an investor who opts for a low-risk ISA Stock and Share account, which could be composed mainly of assets considered low risk, such as government bonds from solid countries, short-term financial instruments, and bonds issued by companies with a solid credit rating. These could then be supplemented, to a lesser extent, by slightly riskier assets such as bonds from developing countries and companies with higher risk, and shares from solid markets. To an even lower extent, inflation-linked bonds, real estate and commodities could also be included in the portfolio.
A high-risk ISA, on the other hand, could include only shares from developed and emerging markets, diversified by sector, company, timeframe and geographical area.
How to get the best out of diversification
Reducing the level of risk in your portfolio is therefore the main purpose of diversification, but this objective can only be achieved if investments are selected in a conscious way.
It is not enough to randomly add different securities to your portfolio to reduce risk. On the contrary, the choice must be preceded by careful market analysis, sector studies, and evaluation of data and statistics.
To avoid mistakes, non-professionals should always rely on expert advisors and avoid doing it themselves.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.
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