Diversification’ is an investment technique that mixes different kinds of investments in a portfolio.
The rationale behind diversification is that the positive performance of some of your investments will offset the potential negative performance of other investments. For example, you can reduce economic risk and offset the risk of negative performance in domestic shares by investing also in international shares.
Similarly, you can reduce exchange rate risk by spreading your overseas investments among different countries. You can also reduce institutional risk by spreading your investments across different asset classes, companies and fund managers. These techniques will limit the impact on your portfolio of an unfavorable movement in any one country, any particular currency or any particular asset class or investment.