What is diversification of risk?

Diversification of risk refers is a term used in investment management. When you invest your money, it's important to earn a high return, but it's also important that you don't take on too much risk. If you invest all your money in one type of stock or investment, if that particular investment starts to do badly, the total value of your investments will decrease. It's like putting all your money on one number in roulette. But if you put your money on several numbers, you're less likely to lose all your money. That is diversification of risk: it is spreading your money around so that your losses won't be too large if one part of the economy goes down.

Diversification of risk refers to how you invest your money, usually when referring to retirement planning. Depending how close to retirement you are will determine the amount of risk you may want to take. All retirement plans have several options for you to invest your money. The younger you are, typically, the higher percentage of your investment is recommended to be placed in aggressive stocks. These are stocks that may fluctuate greatly, but over time, will likely yield a greater return for your investment. Diversifying your risk would be to have a certain percentage of your investment in aggressive (fluctuates greatly but pays off well in the long run), moderate (fluctuate a little), and low risk options (think slow and steady, but not a big money earner).