What is diversification? Simply explained

Diversification is the practice of spreading your money across different types of investments—like shares, bonds, industries, and countries—so that your portfolio doesn’t depend on the performance of a single investment.

The idea is simple: don’t put all your eggs in one basket. By investing in a mix of assets, you reduce the risk that a single poor-performing investment will drag everything down. While it doesn’t guarantee profits or prevent losses, diversification is one of the most common ways investors try to manage risk—especially over the long term.

Diversified investing is a popular strategy for beginners who want to start with small investments, grow their money through long-term investing, and prefer passive investing strategies that don’t require daily market monitoring.

However, it’s important to know that all investing carries risk. You may lose part or all of your money, and returns from the past are no guarantee of what will happen in the future. If you’re not sure what’s right for you, it’s a good idea to speak to a financial advisor.

Why do people diversify their investments?

The main reason is to reduce risk. If you invest everything in one company and that company performs badly, your whole portfolio takes a hit. But if you spread your investments across lots of different areas—companies, sectors, regions—then a drop in one area might be balanced out by gains in another.

This kind of risk management is a key principle in long-term investing, where the aim is steady growth over time, not short-term wins.

Diversification can help protect investors from market fluctuations by ensuring they’re not overly exposed to a single risk.

What’s in a diversified ETF portfolio?

A popular way to diversify is by investing in ETFs—Exchange Traded Funds. An ETF is like a basket that holds lots of investments. You buy shares in the basket, and inside it might be hundreds (or even thousands) of companies or bonds.

For example, a typical ETF portfolio might include:

• Equity ETFs with shares from companies in Europe, the US, emerging markets like India and Brazil, and Asia-Pacific regions such as Australia and Japan.

• Bond ETFs with loans issued by European governments or large companies.

At Peaks, you invest in a well-diversified portfolio from the very start. Every standard Peaks portfolio includes a carefully selected mix of regions, industries and asset types to reflect varying levels of risk. These are selected to offer broad diversification.

Prefer to take more control? Peaks also lets you build a custom portfolio. That means you can tweak your diversification by choosing how much to invest in each type of ETF, depending on your goals and preferences.

The European Securities and Markets Authority (ESMA) provides independent information about different investment firms and what to look out for before starting to invest.

What does diversifying your portfolio mean?

When people talk about building a diversified investment portfolio, they’re usually referring to spreading their money across different:

• Asset types – such as shares (equities), bonds, and cash equivalents

• Geographies – like Europe, the US, or emerging markets

• Sectors – for example, technology, healthcare, and energy

• Risk levels – mixing more volatile assets with more stable ones

This way, even if one part of your portfolio struggles, others may hold steady or grow. 

Of course, even a well-diversified portfolio can lose value in a downturn. That’s why it’s important to invest only what you can afford to lose.

If you’re using Peaks, you’re automatically investing in a well-diversified ETF portfolio from the start—built to include a mix of companies, regions, and bonds. You also have the option to create a custom portfolio and adjust your mix to suit your own preferences.

How ETFs and index funds make diversification easy

An ETF (Exchange Traded Fund) is like a bundle of investments you can buy with a single click. For example, one ETF might contain hundreds of companies across the US tech sector, while another tracks European government bonds.

Index funds work similarly—they follow the performance of a specific market index, like the FTSE 100 or the S&P 500.

Many believe that ETFs are a practical way for retail investors to access a wide variety of markets with relatively low risk and cost. They’re a useful tool for passive and diversified investing.

To see why they’re especially beginner-friendly, check out Peaks’ article on why ETFs are good for beginners.

Can you customise a diversified investment portfolio?

Yes! While ready-made portfolios are a great starting point, some platforms allow you to adjust your investments as your needs or confidence grow.

With Peaks, for example, you can:

• Stick with a pre-built portfolio that’s automatically diversified

• Build a custom portfolio by selecting your own mix of ETFs

• Adjust your balance between equities and bonds depending on how much risk you’re comfortable with

It’s important to understand your own financial goals and preferences before investing. Diversification helps, but it doesn’t remove the need for careful planning.

Peaks also supports good investing habits like monthly investing, which helps smooth out market fluctuations over time.

Just remember: Peaks is an execution-only firm, not a financial advisor. If you’re unsure about your investment choices, it’s a good idea to speak to a qualified professional.

Is diversification enough to keep your money safe?

Diversification is one of the most widely used strategies to manage investment risk. It’s not a silver bullet, but it can help reduce the ups and downs that come from relying on a single investment.

That said, no strategy can guarantee your money is safe. Markets rise and fall. Even diversified investments lose value sometimes. Always consider your risk tolerance, your goals, and your timeframe.

And most importantly: never invest more than you’re prepared to lose.

If you’re looking for clear, neutral guidance on how to protect yourself as a consumer living in the Netherlands, the Dutch Authority for the Financial Markets (AFM) offers helpful tools and tips.

Diversified ETF investing with Peaks

At Peaks, we aim to make investing simple, accessible, and understandable.

Here’s how:

• Our ETF portfolios are diversified by default—no guesswork needed

• You can start small, and build up with monthly deposits

• Prefer control? Create a custom portfolio that fits your goals

• All this, without needing to watch the market every day