Diversification, Asset Allocation

Diversification - allocating investments among various assets and asset classes. Diversification is a strategy to reduce risk. Our investing risk page discusses various risks for investments: business risk, market risk, interest rate risk, inflation risk...

Diversification allows the portfolio as a whole, to be less at risk for these risks than one investment would be. If you add more businesses the risk to the overall portfolio of any one business is reduced.

Assets can be allocated among various asset classes to reduce the risk of any one asset class on the entire portfolio. For example owning: growth stocks, short term bonds, emerging market stocks, commercial real estate fund, international stocks, your own house, money market fund, gold.

A stock mutual fund is an example of diversification. You buy a mutual fund which owns many stocks (normally they own well over 100, though they can own less). Thus the risk of any one stock to your overall portfolio is reduced. Of course the same is true for gains, the benefits to your overall portfolio of one great performer are reduced.


Curious Cat Investing Library
Dictionary: PE ratio, Dollar Cost Averaging , Balance Sheet
Topics: China - Economics - Real Estate - Trading
Great Investors Focus: Darvas - Livermore - O'Neil - Soros
Authors: Levitt - Schwager Investment Bookstore