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| Diversification: Many Eggs, Many Baskets |
| When you diversify your account, you are essentially splitting your money among several investment options, so that if one option you choose does poorly your entire investment won't suffer the same fate. |
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| Suppose, for example, you invest all of your money in the stock of Big Technology Corp. Your entire investment will be wrapped up in that company's performance. The return on your investment will depend on internal factors such as how well the company's products do, how successful its research and development is, and what personnel changes it makes–not to mention how well the industry as a whole performs. |
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| On the other hand, if you put half of your investment into Big Technology and the other half into Big Oil Co., you will significantly reduce your reliance on either investment. During periods when Big Oil–or the petroleum industry overall–is doing poorly, Big Tech may be doing well, and vice versa. There may be times, though, when the whole economy declines and all your investments will do poorly at the same time (which is what occurred during the 2008 downturn). But diversification across a broad spectrum of industries will generally help protect your investment. |
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| You can continue to add other stocks to your portfolio, further spreading out your risk exposure. That said, eventually the laws of diminished returns will kick in. In other words, you eventually will reach the point where adding another stock or investment to your portfolio doesn't offer any additional diversification benefit. A financial advisor can help you determine how much is too much. |
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| Proper asset allocation (having investment types such as bonds and stocks that balance each other out in terms of performance) and diversification (having investments from different sectors, countries, and company sizes) not only reduces your overall risk, but also can help position your account for growth. |
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