{"id":10927,"date":"2016-09-27T10:20:40","date_gmt":"2016-09-27T17:20:40","guid":{"rendered":"http:\/\/www.marketriders.com\/investing\/?p=10927"},"modified":"2016-12-20T13:41:46","modified_gmt":"2016-12-20T21:41:46","slug":"investor-facts-diversification","status":"publish","type":"post","link":"https:\/\/www.marketriders.com\/investing\/investor-facts-diversification\/","title":{"rendered":"Investor Facts: What Is Diversification?"},"content":{"rendered":"

Diversification is the practice of owning a wide variety of investment types in order to reduce risk.<\/p>\n

Investors sometimes find the idea of diversification daunting, but it\u2019s nothing more than not putting all of your eggs into one basket.<\/p>\n

For instance, owning 1,000 stocks through an index fund\u00a0provides\u00a0more diversification than owning 100 stocks in an active mutual fund<\/a>\u00a0and far more than owning 10 stocks directly. If those investments are different from each other, that increases the level of diversification.<\/p>\n

\"diversification\"<\/p>\n

Furthering the\u00a0stock example, diversification means owning both large-cap stocks and small-cap stocks and both foreign and U.S. stocks. Larger portfolios might drill down into mid-caps, emerging market stocks, dividend stocks and so on.<\/p>\n

From there, diversification might\u00a0continue into owning additional\u00a0investment asset classes, such as bonds, real estate, commodities and cash.<\/p>\n

Investors come and go from the different asset classes depending upon their collective perception of the economy, politics, corporate earnings and other factors. Nevertheless, they rarely abandon an asset class and, often, market prices revert\u00a0to the long-term average, or mean, for that asset class.<\/p>\n

Diversification thus can provide much of the returns of each asset class while not amplifying the risk that comes from\u00a0putting all of your money into any one investment type.<\/p>\n

Diversification is a proven portfolio strategy that far too many people ignore at their own risk.<\/p>\n

Often, investors load up on a single stock because they see it touted on television or on the Internet. Others build up a retirement plan by taking company stock from their employer and never selling. Pretty soon, it\u2019s most or all of their money in one stock.<\/p>\n

Loyalty to a company is fine, but the price of that loyalty to your retirement can be high. Just ask anyone who held Enron or General Motors stock when those companies went under<\/a>!<\/p>\n

Good practice<\/h2>\n

Sad as those stories are, you can diversify automatically by using a large-cap mutual fund to own stocks instead of picking them yourself. Most mutual funds own dozens or hundreds of positions as a matter of investment\u00a0policy.<\/p>\n

An index fund, meanwhile, is by definition diversified since it holds all of the stocks in an index, such as the 500 stocks in the S&P 500, or the thousands of stocks in a\u00a0world stock or total market fund.<\/p>\n

From there, it\u2019s good practice to add diversification across multiple asset classes, such as bonds, real estate<\/a> and commodities. You will\u00a0find instant diversification by owning\u00a0index fund products that track the benchmarks for each distinct asset grouping.<\/p>\n

Over time, normal market movements will cause your portfolio to become overweighted in some of these initial asset \u00a0class choices. Rebalancing \u2014 selling investments that have gone higher and buying more of those that have moved lower \u2014 is a simple way to return to your target portfolio.<\/p>\n","protected":false},"excerpt":{"rendered":"

Diversification is the practice of owning a wide variety of investment types in order to reduce risk. 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