If you diversify, you may be able to protect
your portfolio against some of the risks of investing without
giving up the level of long-term return that you're seeking.
That's possible because different subclasses
within an asset class carry different levels of risk — sometimes
referred to as
risk-to-return
profiles.
If you select different investments within a
number of subclasses, your portfolio of investments, as a group,
can balance, or offset, the risk that any one investment might
pose individually.
For example, the possibility of frequent
or sudden changes in the value of a small-company stock might
make it a risky investment if that stock makes up a large percentage
of your portfolio. But if your portfolio also includes
blue
chip
stocks, the picture changes.
That's
because the generally greater stability of the blue chips can
help your portfolio maintain its value even if the small-company
stock takes a nosedive but the stock markets overall are strong.
At the same time, the growth potential of the small-company stock
can help balance the typically slower growth of the blue chips.
Remember,
the more narrowly focused your investments, the less diversified you
are. And that can leave your portfolio more vulnerable to sudden swings
in value — and increase your risk for significant losses.
