“Diversification” is probably one of the first terms you see whenever you read about strategies for smart investing. But are you clear on exactly what it means to have a diversified portfolio and why you should care?
Diversifying your investments simply means making sure all of your money isn’t in just one financial “basket.” Instead of investing in a single security, diversified investors put their money into a variety of different stocks, bonds, mutual funds and exchange-traded funds (ETFs).
The idea is that if one of your investments goes down in value, there’s a good chance that another investment will go up in value. In this way, diversification helps you keep your financial life in balance. Diversifying may help you earn a little more on your investments, but the greater value is that diversifying helps reduce your risk of losing money.