What is Portfolio Diversification?
Portfolio diversification is the practice of holding many different investments so that the poor performance of one is offset by the good performance of others. It reduces unsystematic risk without sacrificing expected return, which is why it is often called the only free lunch in finance.
How It Works
- Spread capital across asset classes (equities, fixed income, real estate, cash).
- Within each class, hold positions in many issuers and sectors.
- Pick assets with low or negative correlations to each other.
- Rebalance periodically to keep weights aligned with your target allocation.
Saudi Context
Saudi retail investors increasingly diversify by combining Tadawul-listed equities, sukuk funds and international ETFs offered through licensed Saudi brokers and robo-advisors.
Example
A portfolio that holds 30 Saudi stocks across banking, petrochemicals, retail and telecom will fall less than one that holds only banks when interest rates change.