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Key takeaways
- Diversification reduces risk without sacrificing expected return — the only “free lunch” in investing.
- It works because asset returns are not perfectly correlated.
- Diversification is meaningful across asset classes, sectors, geographies, and individual securities.
- Concentration is acceptable when intentional (founder equity); accidental concentration is the most common portfolio risk.
How Olomon thinks about this
Diversification has to be measured at the household level — not the account level. Olomon assembles every account, equity grant, and entity holding into one portfolio view, so concentration risks (e.g. employer stock + employer 401(k) match in employer stock) become visible long before they hurt.
In-depth definition
Modern Portfolio Theory, formalized by Harry Markowitz in 1952, demonstrated mathematically that diversification can reduce portfolio risk without reducing expected return — because asset returns are not perfectly correlated.[1] That insight remains the cornerstone of professional portfolio construction.
Frequently asked questions
Empirical research suggests most idiosyncratic risk is diversified away by ~30 carefully chosen stocks across sectors. Most households are better served by broadly diversified ETFs that hold thousands of underlying positions.
Sources
Primary, authoritative references.
- 1
Investor.gov (SEC Office of Investor Education and Advocacy)
Asset Allocation and Diversification — Investor.govCited for: Authoritative federal guidance
- 2
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Cite this page
APAOlomon Editorial Team. (2026). Diversification. Olomon Financial Glossary. https://olomon.com/financial-glossary/diversification