"Don't put all your eggs in one basket" may sound old fashioned, but it still remains sound advice in investing. Diversification is perhaps one of the most important tools available to investors to reduce the overall risk within their portfolios.
When you diversify, you invest in different securities within the same asset class, such as stocks, bonds, and cash equivalents. Diversifying within an asset class — for example, within stocks you might choose to own a dozen large company growth stocks, a handful of small company value stocks,
and an S&P 500 Index fund — can help smooth out the returns within a particular sector of your portfolio.
The weakness of any discussion about diversification is that there is no one right answer as to what makes up the perfect portfolio. Each of us has to decide the appropriate level of diversification given the cost and timing of our goals and our risk
tolerance. I have always been overweighted in stocks because I believe in them and my horizon is still long-term. But within the stock category I have diversified with different types of stocks and mutual funds.
But that's just me. Your circumstance could be remarkably different.
Throughout the rest of your journey through diversification, you'll develop the knowledge you'll need to select the kinds of investments that will help you meet your investment goals while taking on the level of risk you're comfortable with.
Don Kittell, Chief Financial Officer, Securities Industry and Financial Markets Association
