What is diversification and asset allocation?

 

Every investor should begin with these two key ideas.

 

Diversification can be summed up with the familiar phrase: “Don’t put all your eggs in one basket.” Including different types of investments in your portfolio may help reduce your losses if one type—stocks, for example—take a hit when other investments like bonds remain steady or go up.

 

Investors achieve diversification through a process called asset allocation, which simply means figuring out how your funds will be spread among different types of investments, such as stocks, bonds, and cash.

 

Diversification may reduce risk, but investors also want to earn a return, so they need to strike a balance between risk and reward. Lower-risk investments carry less chance of a loss but typically provide lower returns. Investors seeking higher returns typically must take on greater risk.

 

Originally published by etrade

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