Most people would rather save their money in a bank somewhere than invest, mainly because of the risks associated with investing. I used to dread the thought of risking my hard-earned money until I understood one of the most basic and effective risk management techniques—diversification.

You’ve probably heard of the term diversification. In finance, diversification refers to the process of assigning capital in a manner that decreases exposure to risk.

The rationale behind diversification is simple—on average, investment portfolios composed of different kinds of investments yield higher returns and pose a lower risk compared to any individual investment within the portfolio. In this article, I’ll cover how to and why you should be diversifying your investment portfolio.