Diversification isn't just about increasing
the sheer number of your investments. It's about striking a balance
among various investments in your portfolio to reduce your exposure
to risk and take advantage of the full range of opportunities
in the market. First, you need to analyze what you already own
before you make another investment. Then you can identify the
category or categories within an
asset
class
that you need to build up.
For example, if you own only long-term
U.S.
Treasurys
in your bond portfolio, you may decide to purchase
municipal bonds or short-term corporate bonds next. The municipals provide tax-free
income, while the short-term corporates provide greater
inflation protection.
Or let's say all of your stock investments
are in large,
blue
chip
companies. Then it may be time to investigate some
smaller company stocks, since they tend to perform differently
— and rise and fall in value at different times — than
larger company stocks. In this way, you can offset some of the
risks that each investment carries on its own, while enjoying
many of the advantages and benefits of each category of investment.
