You work long and hard to save and invest for your retirement. Find out why it’s essential to diversify and avoid risking everything on a few investments.
Most people are familiar with the old saying – “don’t put all your eggs in one basket.” And, this analogy about risk applies to investing as well.
To minimize the chances that stock market volatility could result in the loss of your entire nest egg, it is important to put your money in several investments with different levels of risk and potential return. This basic, yet important, concept is known as diversification.
One common mistake is investing the bulk of your retirement money in one stock. If something unexpected happens and the value of that stock plummets, your comfortable retirement could disappear!
Stock mutual funds provide an easy way to achieve immediate diversification because they often invest in many stocks across a variety of industries. And, you can spread out your risk even more when you invest in multiple funds with different investment objectives.
By diversifying your portfolio, you decrease the chance that all your investments will experience the same negative market forces at the same time.
For more in-depth information, visit the Diversification section of Investing Basics.