Diversify Your Investments
Diversification (or asset allocation) spreads your risk across
numerous financial investments, reducing the
impact that poor returns from any one investment are likely to have on
your overall portfolio.
Diversification follows a simple logic:
- The prices of stocks, bonds, real estate, precious metals, and other
investments often do not rise and fall together. When one type of
investment is on the rise, another may be declining.
- By investing in two or more types of securities, therefore, you increase
the possibility that when something you own is doing poorly, something
else you own will be doing well. Your "winner's" good
performance can offset your loser's disappointing returns.
- The end result: Your portfolio's overall performance is likely to be less
volatile—that is, undergo less price fluctuation—than a portfolio
invested in just one security or one type of security. To put it another
way, a well-diversified portfolio will achieve higher returns for a
given level of risk.
You can spread your risk by investing in:
- All three primary asset classes: cash investments, bonds, and stocks. Some
investors further diversify by holding real estate or precious metals.
- Various types of investments within the primary asset classes, which perform
well under differing economic conditions. (Examples are short-term bonds
and intermediate-term bonds, or growth stocks and value stocks).
- Both U.S. and foreign securities.
- Mutual funds, rather than individual securities. Funds pool your money with
that of many other investors to buy an array of securities within a
single asset class or even across more than one asset class (this is how
you would invest through the 403(b) plan).
Keep in mind that diversification can't eliminate market risk—the possibility
that stock or bond prices overall will decline over short or even extended
periods. Remember, too, that when you diversify your portfolio it may
decline less in down markets—but it will also rise less when markets are
strong.
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