Diversification is the practice of spreading money across different assets so that no single asset decides the outcome of a portfolio. When one holding falls, others can hold steady or rise, which can soften the effect of one loss on the whole.
Many people start with a single asset. It feels simple: one price to watch and one story to follow. That simplicity carries a trade off, because the whole portfolio rises and falls with that one asset.
This guide explains what diversification means, how investors apply it, what it cannot do, and how different assets on Luno fit into the picture.
Diversification in plain terms
The idea is old: placing every egg in one basket leaves nothing if the basket drops. In investing, the basket is an asset such as bitcoin, a company share or gold.
Investor education guidance describes diversification as spreading money across different investments to reduce risk, and notes that conditions that hurt one asset class may help another.
Two terms help here:
Volatility describes how far and how fast an asset’s price moves.
Correlation describes how closely two assets move together. Assets with low correlation tend to move apart from one another. Assets with high correlation tend to move in step.
Why one asset concentrates the outcome
Concentration happens when one asset makes up most or all of a portfolio. The result then depends on that asset’s price, on news about that asset, and on changes in rules that affect it.
The table below uses a hypothetical R100,000 portfolio. It assumes one asset, called asset X, falls 50% while every other holding keeps its value.
Portfolio | Share held in asset X | Loss when X falls 50% | Portfolio value after |
|---|---|---|---|
Single asset | 100% | R50,000 | R50,000 |
Two assets | 70% | R35,000 | R65,000 |
Mixed holdings | 40% | R20,000 | R80,000 |
The figures are an illustration, not a forecast. In practice, other assets can fall at the same time, which the considerations section covers.
Ways investors diversify
Across asset types
Crypto assets, company shares, exchange traded funds (ETFs) and commodities respond to different forces. Interest rates, company earnings and commodity supply each affect them in different ways.
Luno customers in South Africa can hold crypto assets, tokenised stocks and ETFs, and Tether Gold in one place. A tokenised stock is a digital token that represents a share. Tether Gold is a token that represents gold.
Within an asset type
A portfolio can hold several crypto assets with different purposes, such as a store of value, a smart contract network and a stablecoin. A portfolio can hold shares in many companies.
An ETF holds many shares in one product. An ETF that tracks the S&P 500, for example, gives exposure to 500 large US companies through one holding.
Across geographies and currencies
Rand denominated assets and dollar linked assets respond differently when the rand moves. Tokenised US stocks give exposure to US companies and the dollar, and customers buy them in rand.
Across time
Some investors split a purchase into smaller, regular amounts, a method called dollar cost averaging. It spreads the entry price across several dates. It does not remove the chance of loss.
Considerations when diversifying
Diversification reduces reliance on one asset. It does not remove risk. In a broad market fall, many assets can drop together.
Separate assets can move together. Research published in 2022 found a significant rise in the correlation between crypto assets and stocks as crypto adoption grew, which limits some of the spread that holding both provides.
Number of assets is not the measure. Ten assets that move together offer less spread than three that move apart.
More holdings mean more to track. Each purchase carries fees, and each asset has its own considerations.
Diversification does not guarantee a profit or prevent a loss.
How investors think about building a mix
No single mix suits every investor. People who diversify tend to start with questions such as:
What is the goal, and how long is the time horizon?
How large a fall can the portfolio absorb?
How do the current holdings relate to one another?
What share does each asset hold, and how far has that share drifted since the last review?
Rebalancing means adjusting holdings back to chosen proportions after prices move. Some investors rebalance on a schedule. Others rebalance when a holding passes a set share.
Diversification on Luno
Luno offers several ways to hold more than one asset:
Crypto assets across a range of networks and use cases.
Tokenised stocks and ETFs for customers.
Tether Gold for exposure to the gold price.
ZARU, a stablecoin designed to track the rand.
Luno Bundles, curated collections of assets bought in one transaction.
Product availability varies by market and eligibility. Each product carries its own considerations, which Luno sets out on the relevant product page.
Frequently asked questions
What is diversification in simple terms?
Diversification means spreading money across different assets so that no single asset decides the result of a portfolio.
Is holding only bitcoin diversified?
Holding one asset, including bitcoin, is a concentrated position. The price of that one asset decides the result.
How many assets does a diversified portfolio need?
No set number applies. What matters is how the assets relate to one another. Three assets that move apart can spread more than ten that move together.
Does diversification guarantee returns?
No. Diversification can reduce reliance on one asset, but the value of a portfolio can fall.
What is the difference between diversification and asset allocation?
Asset allocation is the split of a portfolio between asset types. Diversification is the spreading of money across and within those types.
