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Diversification

"Overall, your goal should be to develop a balanced portfolio--one that will hold up in the bad times (and there will be bad times, I can assure you) while taking advantage of the good times."

- Illyce R. Glink, author of
100 Questions You Should Ask About Your Personal Finances

Here's an illustration of why it's important to diversify your investments. Say you have a lovely bay window overlooking your front lawn. Your next-door neighbor also has a large window, but his or her's is comprised of 6 individual windowpanes.

Harvey, the self-proclaimed neighborhood golf pro, lives across the street from you. If Harvey happens to swat his golf ball into your bay window, you'll have to replace the whole pane. However, if Harvey instead takes aim at your next-door neighbor's front window, chances are they will only lose 1 of 6 windowpanes. His or her windowpane is not as great an economic loss as yours.

To translate this into investment terms, your neighbor would be better protected against market risk because their money is spread out over 6 different investments. You on the other hand, would suffer a huge loss if all of your money were sunk into just one investment.

 Basic Asset Classes

 Diversification

 

 What is Asset Allocation?

 

What is Asset Rebalancing?

 

Investing Tidbit:

Mutual funds are inherently diversified, as they are comprised of anywhere from 20 to 2000 individual stocks. Professional money managers handle the day-to-day buy and sell decisions. An investment in a mutual fund is one of the easiest and most convenient options for investors seeking diversification.

 

 

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