Diversification is about holding a lot of different types of investments and is an essential factor in any portfolio. You reduce your risk of something bad happening to your investment strategy by holding onto a number of different assets. If something unfortunate happened with one stock, you could still have others holding steady or even doing well. You also increase your chances of something great happening to one of your stocks by holding a large number of different assets! This can go for every type of asset you own. While there's no real guide for exactly how diverse your portfolio needs, experts agree that diversification adds to your investment security. Diversification can decrease the number of and size of big swings in your portfolio.
If we think back to how a portfolio is like a toy chest, it's important to have a variety of items in there. Think of each toy as a different type of investment. If someone spills juice on your Elsa gown, then the value of that dress could go down. The same thing is true with stocks! But if you still have Legos, puzzles, and feather boas to play with, you may make it out just fine.
You've probably heard the warning, "don't put all your eggs in one basket." Diversification is like putting your eggs in different baskets. It ensures that if something happens to one basket, you still have eggs in others.
A diverse portfolio gives you options and can increase your chance of success in the long run. Having different assets gives you more opportunities to make money since you have different things that other people might want. (like a variety of toys in your toy chest.)
A portfolio is a window into your investments. You can see every asset in one spot so that it is really easy to manage. Think about it like a toy chest — you get to store and see all of your goodies in one place.
An investment is something you can buy and hold with the hope that it will make you money. Like a seed, it needs time to grow into a tall tree or produce delicious fruit. But like plants, it's no guarantee that things will go as planned. Through diversification, buying a bunch of different things increases your chances of some of those "seeds" doing well, even if others don't.
A stock is a little piece of a much bigger company. Imagine that a company is a castle made out of Legos. A stock is like one Lego piece in that castle: When you buy the stock, you own that piece of the company.
A bond is like an "I owe you" (IOU) from a company or government that can be traded on the market. When a company needs money, it can sell bonds to people like you and me. They "borrow" this money from you, hoping that your investment can help grow the company. You make money if they pay you back with interest over time. The interest rate on each bond is different. More risky bonds have a higher interest rate, since it is more likely that they won’t pay back on time and lenders need to charge a higher rate to make up for potential losses.
A mutual fund is a collection of stocks, bonds, or other investments managed by financial professionals. A mutual fund allows investors to invest in many different companies with a single purchase. Investing in a diverse portfolio can make you a more resilient investor because you don't have "all your eggs in one basket." It's why mutual funds are popular choices for investing in many retirement investment accounts.
This information is educational, and is not an offer to sell or a solicitation of an offer to buy any security. This information is not a recommendation to buy, hold, or sell an investment or financial product, or take any action. This information is neither individualized nor a research report, and must not serve as the basis for any investment decision. All investments involve risk, including the possible loss of capital. Past performance does not guarantee future results or returns. Before making decisions with legal, tax, or accounting effects, you should consult appropriate professionals.