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.

Last reviewed: 3 August 2026

Definition

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.

Frequently asked questions

Can I be diversified with just three or four Nigerian stocks?

Three or four stocks across different sectors provides more diversification than a single stock, but is still relatively concentrated. A single bad outcome for one company would significantly affect your portfolio. Most investors aim to increase the number of holdings over time as their portfolio grows.

Should I diversify by buying the same type of company in different countries?

Geographic diversification — holding investments in companies across different countries — reduces country-specific risk. For Nigerian investors whose primary exposure is NGX-listed shares, holding some international assets can reduce concentration in the Nigerian economy. This involves additional complexity and is a personal decision based on goals and risk tolerance.

Does owning shares in two Nigerian banks count as diversification?

Two banks in the same country provide some stock-specific diversification — different management, balance sheet quality, and customer base — but they are exposed to the same macroeconomic and regulatory environment. True sector diversification means holding companies in different industries, not just different companies in the same industry.

Does diversification guarantee I won't lose money?

No. Diversification reduces the impact of any one investment performing badly, but it cannot prevent portfolio losses during broad market downturns. All investments carry risk, including the risk of loss.

When should I start diversifying?

Start with what you can afford. If you are beginning with a small amount, you may only be able to buy one or two companies initially. That is fine — diversification is a goal to build toward as your portfolio grows through regular contributions and dividend reinvestment.

Important disclaimer

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.