Most people have probably heard of the adage: “Do not put all your eggs in the same basket”. Applied to investments, it advises that you should not invest all your money into a single security.
This seems like a very intuitive way to invest. Moreover, it seems that spreading your portfolio around more securities would reduce the probability that you lose most of your wealth. But yet, extensive academic research on individual investors consistently finds that the average number of stocks held in a trading account is less than 10. Although a commonly used term, diversification is often misunderstood, even among successful traders. In this article, we discuss five common fallacies about diversification.
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