Diversification: The Practice of Not Putting All Your Eggs in One Basket

Just as with eggs, spreading your money across a range of investments can help reduce risk in your portfolio by lessening the impact that a fall in any one market, sector, region, or individual investment may have on the overall performance of your portfolio.

Spread your money across asset classes.

Diversification begins with deciding how to allocate your portfolio among various types of assets, such as stocks, bonds, and cash investments.

Including less risky assets, such as bonds and cash, in your portfolio can help reduce risk in your overall portfolio. During a stock market downturn, a portfolio containing stocks, bonds, and cash is apt to lose less in value than an all-stock portfolio.

The addition of less risky assets helps smooth out the ups and downs in the portfolio’s value. This can be well worth it for investors who want to reduce risk.

Spread your money within asset classes.

In addition to diversifying across asset classes, it is also important to diversify within asset classes.

Take stocks, for example. Spreading your money across a broad range of stocks can help reduce risk by lessening the impact of a fall in one company or one part of the stock market on your overall portfolio.

When investing in stocks, consider spreading your money across different companies, sectors, industries, market capitalizations, and regions of the world.

With bonds, you may want to spread your money across different types of bonds from various issuers and with varying maturities.

Mutual funds and exchange-traded funds (ETFs) can be useful in diversifying a portfolio. Funds may hold hundreds or even thousands of individual securities making it possible to build a diversified portfolio with just a few well-chosen funds. Investing in individual securities is also an option.

Diversification is essential when it comes to managing a portfolio’s overall risk. For advice on how to diversify your portfolio, please contact us. With offices in Rutland and Williston, Vermont Copper Leaf Financial develops a customized wealth management plan designed to integrate every aspect of your financial life. Our approach is to provide clarity and calm amidst the chaos. Where there is uncertainty we look for facts. We call our approach evidence-based investing. Call us today at 802-878-2731 to schedule a strategy session and begin building your road map to financial success.

Article published in September 2020 edition of Eye on Money. If you would like to be added to our mail list please email jennifer@dh-cpa.com.