Diversification is the unglamorous idea that owning one thing is a bet and owning many things is an average. If everything is in one company and that company fails, everything is gone. Spread across hundreds, one failure is a bad day rather than the end of the story.
It does not remove risk. It removes the particular risk of being wrong about one thing, and leaves the general risk that a great many things sometimes move together. Both are real. Only one of them can be spread.
An index is a list with rules: the largest companies in a market, say, weighted by size. An index fund is a pot of money that holds what the list says, in the proportions the list says, and does nothing else.
Doing nothing else is the point. There is no team choosing, so there is less to pay for, and the cost of running it is usually a small fraction of a percent a year rather than a large one. Over decades, cost compounds in exactly the way returns do.
Fees compound as well. They simply compound against you.
The trade is that such a fund can never beat the list it follows. It holds the poor parts of a market along with the good ones, and in a falling market it falls with it.
There is also more than one kind of concentration. A fund can hold hundreds of companies and still be concentrated in one country or one industry, if that is what the list contains.
Whether any of this suits a particular person, in what proportion and by what route, depends on their situation, their timescale and rules that differ by country. This piece explains the mechanism and stops there. A licensed professional can advise. An app cannot, and Peeka will not.
General information about how money works, not advice. What is right for you depends on your own situation, and a licensed professional can look at that with you.
Peeka carries this piece too, under Insights and Learn, with the examples in your own currency. Read it in the appGet the app
