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Diversification means
investing in a wide variety of asset classes, security types and industries in order to
reduce risk exposure while striving for substantial rewards. The general idea is that you
want your investments to be different enough so that when one is doing poorly, another
might be doing well.
Ways to diversify your investments include:
Investing in more than one asset type. For example, include stock, bond and cash
investments in your portfolio.
Buying different varieties of the same security type. For instance, rather than buying
just large-cap stocks, buy some small-cap, too.
Investing in different industries.
Investing in mutual funds.
Diversifying among different types of mutual funds.
Diversification does more than just reduce risk. An intelligently diversified portfolio
will nearly always outperform a single investment. |
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