Diversification is a powerful investment principle that can
reduce risk by spreading your money among different
investments.
For example, individual stocks may perform differently
under the same market conditions. By investing in a number of
different stocks, you can blunt the effect of a decline in the
value of one particular stock.
Investing in a stock mutual fund, instead of one specific
stock, is a way to diversify in a single investment.
Diversification can reduce risk by spreading your money
into different investments.
But you can take diversification, and its benefits, even
further.
Stocks make up one major asset class. Bonds make up
another, and cash instruments a third.
Different asset classes have generally performed
differently under the same market conditions. By diversifying
among the major asset classes, you can reduce the risk of
putting all your investments in just one asset class.
This kind of diversification is called "asset
allocation".
