Diversification is an investment principle designed to manage risk, though it does not guarantee against loss. The key is to identify investments that may perform differently under various market conditions.
On one level, a diversified portfolio should be allocated between asset classes, such as stocks, bonds, and cash alternatives. On another level, it should also be varied within asset classes, such as a diverse basket of stocks.
For example, let’s say a stock portfolio included a computer company, a software developer, and an internet service provider. Although the portfolio has spread its risk among three companies, it may not be considered well diversified, as all the firms are connected to the technology industry. A portfolio that includes a computer company, a drug manufacturer, and an oil service firm, however, may be considered more diversified.
The concept of diversification is critical to understand when you are evaluating an investment portfolio.
If you want more information on diversification or have questions about how your money is invested, make an appointment with a Member Benefits’ financial advisor to review your personal situation.