Diversification in terms of personal finance is an investment strategy that involves distributing money in different investments , rather than concentrating it on a single investment or a single type of investment.
Diversification is a widely recommended by specialists strategy because it is considered the most effective way to reduce or control the risk when investing.
If an investor decides to concentrate all your money in one investment, risk investment gets bad results and get to lose some or all of your money.
Instead, if you invest in a diversified manner reduces or minimizes risk as to lose their money, more of the investments acquired would have to have bad results at the same time.
Any investment always carries a risk, generally, the more profit potential offered an investment, the greater the risk involved and, conversely, the less profitable offer, the lower your risk.
So ideally when to diversify is to create a portfolio or investment portfolio that combines investments that offer high returns but also a high risk (eg business or shares), and investments that offer low returns but greater security (eg, time deposits or mutual funds).
The ratio of these two types of investments will be given by our profitability targets, the risk that we are willing to take, or the investment profile we have.
If, for example, seek to achieve greater profitability, most investments that constitute our portfolio must be investments that offer high returns, but also higher risk. If we have little tolerance for risk, most investments that constitute our portfolio must be investments that offer little return, but lower risk.