Don't put all your eggs in one basket. Nowhere is that old adage more true than in investing.
Because different areas of the market rise and fall at different times, it's important to make sure that your portfolio is always diversified across a variety of mutual funds and kinds of securities. If one sector or security is underperforming, strong performance in other sectors could help make up for it. In other words, if your whole investment portfolio is in one sector or security, then your whole portfolio lags when that sector or security lags. By diversifying, you can help reduce the overall risk of your portfolio.
There are many ways to diversify your investments. Mutual funds as an investment vehicle offer built-in diversification because they invest in dozens of securities.
Many investment professionals recommend diversification across at least two asset classes. But you can also diversify even within a given sector. For example, if you're primarily interested in stocks, you can invest in a stock mutual fund instead of buying individual securities. In addition, you might choose to invest in a more conservative, income-oriented stock fund as well as an aggressive, growth-seeking stock fund.
The Benefits of Diversification
A diversified portfolio can improve total return - by reducing exposure to losses while taking advantage of gains.
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