Diversification is often referred to as the only free lunch. This is because diversification is the only way you are able to not only reduce risk but do so without decreasing expected return.

When done correctly, a diversified stock portfolio is an extremely powerful way to smooth your returns, lower your risk and use your capital efficiently.

Unfortunately there is a lot of misinformation and bad advice out there on how to correctly diversify your stock portfolio. It takes more than simply adding lots of positions or including bonds in your portfolio to really benefit from diversification.

In fact, if done incorrectly it's possible to increase your portfolio risk, increase the volatility of your returns and waste your investment capital.