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 hers 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 she'll only lose 1 of
6 windowpanes. 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 her 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.
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