What Is Portfolio Diversification?
The principle behind diversification is straightforward: different companies and sectors do not all move in the same direction at the same time. When one sector faces challenges, another may be performing well. By holding a mix of different investments, you reduce the chance that any single company's problems significantly damage your overall portfolio.
Portfolio Diversification. Portfolio diversification is the practice of spreading investments across multiple different assets, companies, or sectors — rather than concentrating all investment in a single holding. The goal is to reduce the overall risk of the portfolio by ensuring that poor performance in any one investment has a limited impact on the whole.
Why diversification matters
If your entire investment portfolio is in a single company's shares, and that company encounters serious difficulties — a management scandal, a regulatory problem, or a decline in its core business — your entire portfolio is affected. If the same investment is spread across ten different companies in different sectors, the impact of one company's difficulties is limited to approximately one-tenth of your portfolio. Diversification does not eliminate the risk of loss — it limits concentration risk.
Sector diversification on the NGX
The Nigerian Exchange Group lists companies across multiple sectors — banking and financial services, consumer goods, oil and gas, telecommunications, industrials, agriculture, and others. A diversified NGX portfolio typically holds companies across several of these sectors, so that a challenge facing one industry does not impact the whole portfolio equally. The number of sectors and the specific balance depends on individual investment goals and preferences.
How many companies do you need for diversification?
There is no magic number, but most investors find that holding between 8 and 15 different companies across different sectors provides meaningful diversification without making the portfolio unmanageably complex. Holding 2 or 3 companies is generally considered relatively concentrated. Holding 50+ individual stocks becomes difficult to monitor and may not provide significantly more risk reduction than a smaller, well-selected portfolio. For small starting portfolios, it is normal to start with fewer companies and add more over time.
Diversification and company size
On the NGX, listed companies range from large-cap blue chips — well-established, widely followed companies with significant market capitalisations — to smaller, less liquid companies. Many investors choose to weight their portfolios toward larger, more liquid companies for the core, with smaller exposure to smaller companies. Mixing company sizes as well as sectors adds another dimension of diversification.
Limits of diversification
Diversification within a single stock market — like the NGX — does not protect against market-wide falls. When the overall NGX declines, most shares in the market tend to fall together, regardless of sector. This is called systematic or market risk. Diversification primarily addresses unsystematic risk — the risk specific to individual companies or sectors. For broader protection against country-specific risk, some investors also hold investments across different geographic markets.
Questions
About portfolio diversification
This page is for general information and educational purposes only. It does not constitute financial advice. All investments carry risk including the risk of loss. Diversification does not guarantee profit or prevent losses. Shares Saver does not provide financial advice.
Own shares in your name
Start from ₦10,000 a month. Pause whenever you like.