What Is Diversification?
Virtually every investment has some type of risk
associated with it. The stock market
rises and falls. An increase in interest
rates can cause a decline in the bond
market. No matter what you decide to
invest in, risk is something you must
consider.
The key to successful
investing is managing risk while
maintaining the potential for adequate
returns on your investments. One of the
most effective ways to help manage your
investment risk is to diversify.
Diversification is an investment
strategy aimed at managing risk by
spreading your money across a variety of
investments such as stocks, bonds, real
estate, and cash equivalents.
The main philosophy
behind diversification is really quite
simple: “Don’t put all your eggs in one
basket.” Spreading the risk among a
number of different investment
categories, as well as over several
different industries, can help offset a
loss in any one investment.
Likewise, the power of
diversification may help smooth your
returns over time. As one investment
increases, it may offset the decreases
in another. This may allow your
portfolio to ride out market
fluctuations, providing a more steady
performance under various economic
conditions. By reducing the impact of
market ups and downs, diversification
can go far in enhancing your comfort
level with investing.
Diversification is one of
the main reasons why mutual funds are so
attractive for both experienced and
novice investors. Many non-institutional
investors have a limited investment
budget and may find it challenging to
construct a portfolio that is
sufficiently diversified.
For a modest initial
investment, you can purchase shares in a
diversified portfolio of securities. You
have “built-in” diversification.
Depending on the objectives of the fund,
it may contain a variety of stocks,
bonds, and cash vehicles, or a
combination of them.
Whether you are investing
in mutual funds or are putting together
your own combination of stocks, bonds,
and other investment vehicles, it is a
good idea to keep in mind the importance
of diversifying. Diversification does
not guarantee against loss; it is a
method used to manage investment
risk. The value of stocks, bonds, and
mutual funds fluctuate with market
conditions. Shares, when sold, may be
worth more or less than their original
cost.
Mutual funds are sold
only by prospectus. Please consider the
investment objectives, risks, charges,
and expenses carefully before investing.
The prospectus, which contains this and
other information about the investment
company, can be obtained from your
financial professional. Be sure to read
the prospectus carefully before deciding
whether to invest.
|