Diversification

Diversification means buying a variety of investments of each type rather than just one or two. That might include:

• Stock in companies of different sizes, in different businesses, or based in different countries
• Bonds from different types of issuers, with different terms, and different credit ratings

It’s smart to diversify because no single investment or type of investment produces strong returns all the time. When some are having a bad year, others may be doing better. So by owning a variety, you increase the potential for keeping your average return positive. In that way, a broadly diversified portfolio limits the risk you have to take to achieve your goals.

Mutual funds and ETFs can be a convenient way to diversify, since each fund portfolio is already diversified. For example, buying shares of a fund that tracks the S&P 500 is more convenient and much more cost effective than buying shares in each of the 500 companies in the index.

 

Slide (11/15)