Diversification — slides
Financial Literacy Club
Investing · Lesson 5
Diversification
Why owning many things reduces the damage any one can do.
10-minute lesson · learnwithflc.org
Diversification · 1 / 19
Financial Literacy Club
Investing · Lesson 5
Diversification
Why owning many things reduces the damage any one can do.
10-minute lesson · learnwithflc.org
Today's goals
By the end of class, you'll be able to…
- Explain diversification and why it reduces single-company risk
- Distinguish company-specific risk from market-wide risk
- Evaluate whether a portfolio is truly diversified
Warm-up
“Don't put all your eggs in one basket.” What could go wrong with one basket? Now apply that idea to money.
Think, then write your answer.
The big idea
Diversification
Why owning many things reduces the damage any one can do.
Investing · Lesson 5
Diversification means spreading your money across many different investments, so no single one can sink you. It's the investing version of "don't put all your eggs in one basket."
Investing · Lesson 5
Some risks belong to a single company — a failed product, a scandal, a new competitor. Diversification shrinks those risks dramatically, because one company's bad year is a small slice of the whole.
Investing · Lesson 5
Other risks hit almost everything at once — recessions, interest rate changes, market panics. Diversification can't remove those. It reduces risk; it doesn't eliminate it.
Investing · Lesson 5
- Across companies: many businesses, not a few.
- Across industries: tech, health care, energy, consumer goods, and more.
- Across asset types: stocks and bonds behave differently.
- Across countries: U.S. and international markets.
Investing · Lesson 5
Owning a lot of one thing isn't diversified
Five tech companies is still a bet on tech. Your employer's stock, if you work there, is doubly risky: a bad year could hit your job and your investments together.
See it
If all your money is in one company and it drops 50%, your portfolio loses 50%. If your money is split evenly across 20 companies and one drops 50%, your portfolio loses 2.5%.
All in one company
Split evenly across 20 companies
Real example
One basket vs. twenty
Two investors each put in $1,000. Then one company in the market has a disastrous year and drops 50%.
- Investor A put everything in that company: $1,000 → $500.
- Investor B split $50 across 20 companies, including that one: she loses $25, or 2.5%, from that stock.
Investor B also gave up the chance of a huge gain from one company. That's the trade: diversification gives up lottery-ticket upside to avoid wipeouts.
Activity · small groups · 10 min
Basket Challenge
- Each group gets $1,000 to invest one of three ways: all in 1 company, equally in 5 companies in the same industry, or equally in 20 companies across many industries.
- Reveal events one at a time: (1) one company in each basket drops 50%; (2) the whole tech industry falls 30% (the 5-company basket is all tech; 4 of the 20 are tech); (3) the whole market falls 20%.
- Groups calculate their loss after each event (treat each event separately).
- Discuss which risks diversification reduced and which it didn't.
Check for understanding · 1 of 3
Your money is split evenly across 25 companies. One of them goes out of business.
About how much of your portfolio did you lose from that company?
- AAbout 4%
- BAbout 25%
- CAll of it
- DAbout 50%
A. About 4%
Each company is 1/25 of your money — 4%. Losing one entirely costs about 4%.
Check for understanding · 2 of 3
A diversified portfolio can't lose value during a recession.
- True
- False
False
Diversification reduces company-specific risk, but broad downturns can pull almost everything down at once.
Check for understanding · 3 of 3
Which of these is the most diversified?
- AFive video game companies
- BOne company you love
- CA fund holding hundreds of companies across many industries
- DThree companies in the same city
C. A fund holding hundreds of companies across many industries
Spreading across many companies and industries reduces the damage any one business can do.
Remember
Key takeaways
- Diversification = don't put all your eggs in one basket.
- It shrinks single-company risk — not market-wide risk.
- Many companies in one industry isn't truly diversified.
- It trades lottery-ticket upside for protection from wipeouts.
Discuss
Talk it over
- Why might someone still choose to invest heavily in one company?
- Where else do people use diversification in everyday life?
Exit ticket
What kind of risk can diversification not remove?
Answer on your exit ticket before you leave.
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