Loyal Wealth Managers

Home > Investment Stategy >Diversification

Investment Strategy

Choosing Investments

Compounding

Common Investing Mistakes

Diversification

Simply put, diversification means choosing several baskets for your investment eggs. Sure, you could hit it big during good times by investing solely in one stock or sector. But this strategy can be devastating if the market crashes and leaves you with a basket of broken eggs.

Diversification is a little like buying insurance. By investing in multiple asset categories-stocks, bonds, cash and real estate to name a few-you're less likely to get hurt if one fares poorly.

Different ways to diversify

You can diversify within an asset category, across asset categories and investment styles, and globally.

Diversifying within an asset category.By diversifying, you can reduce the impact on your investments when a specific security does poorly. You could do this by purchasing many bonds, for example, instead of one or two.

You're not really diversified, however, if all those bonds have short maturities. Diversification means owning different types of bonds-long term, short term, government, corporate and possibly high yield.

Diversifying among asset categories.Diversifying can also reduce the risk that an entire asset category, such as stocks, will do poorly for an extended period of time. You can select investments from several asset categories-stocks, bonds, cash and real estate, for example.

Diversifying across investment styles. Value and growth stocks do not usually move in tandem. In one year, one style typically outperforms the other. It's somewhat like shopping, sometimes there's nothing better than a bargain and other times it's better to spend a little more for something special.

Growth stocks tend to be more volatile than value stocks and are associated with higher levels of risk and return.

Diversifying globally. Another advantage of diversifying is that you reduce the risk that local financial markets will suffer an extended bear market. While global investing includes some additional risks, such as currency fluctuations and political uncertainty, diversifying globally can help offset overall portfolio volatility.

Mutual funds-the easiest way to diversify Many people simply don't have enough money to invest in a broad array of individual stocks, bonds and other assets, much less the time and energy to research and monitor them. For these investors, mutual funds may represent the most sensible option. Mutual funds are, by definition, diversified. A single fund can hold securities from hundreds of issuers. Funds are professionally managed providing an easy and cost-effective way to invest within asset categories, across asset categories and investment styles, and globally.