Diversification: understand where portfolio risk comes from

Learn to compare asset classes, sectors and regions, then test different allocations in a simulated portfolio.

Different names can share the same risk

Diversification means spreading exposure across investments with different sources of risk and return. Owning many symbols is not enough if they all respond to the same economic forces. A technology stock and a technology fund may overlap substantially. Diversification can reduce concentration; it cannot prevent every loss.

Asset allocation is the division of a portfolio among broad categories such as stocks, bonds and cash. Within each category, sector, issuer, geography and investment style also matter. An ETF is a fund structure, so an ETF holding bonds has different underlying exposure from an ETF holding stocks.

Read the allocation charts carefully

The practice dashboard groups holdings by their catalog asset type and by individual holding, including cash. These are position-value charts, not a look-through analysis of the securities inside a fund. A bond ETF appears under ETF, while a fictional individual bond appears under Bond.

For example, a $10,000 portfolio holding $2,000 of one stock, $3,000 of an ETF and $5,000 of cash has 20%, 30% and 50% allocation respectively. If the stock value changes, its weight and the total portfolio value change even without another trade.

Compare two practice allocations

Create a portfolio and record a few trades. Duplicate it, give the copy a descriptive name and change its holdings. Apply the same simulated scenario to each portfolio and compare cash, unrealized gains or losses and allocation.

This exercise illustrates arithmetic and concentration. It does not estimate real correlations, future volatility or an appropriate allocation for your circumstances. The price model is deterministic and omits real-world fees and distributions.

Practice investing with virtual money · Paper trading guide · Practice methodology