What is Diversification?

How does diversification work?

If you put money in different types of investments, you should not be wiped out if/when one investment fails.

Diversification

An investment strategy in which you spread your investment dollars among industry sectors.

Risk Tolerance

An investor's "ability" to accept loss of some or all of the money they have invested. It is based on factors such as age, income, financial stability, etc.

Portfolio

A collection of investments owned by an individual or organization.

Rules for Diversification

1. Invest in at least three different industries 2. Buy different financial products (stocks, bonds, mutual funds, etc.) 3. Diversify holdings even within an industry (small, mid, large cap)

Industry

A group of companies that make the same products. (Glaxo and Merck are part of the pharmaceuticals industry.)

Sector

A group of related industries. The performance of any single stock can be measured against the entire group. (Drug manufacturers and hospitals are part of the health care sector.)

Why diversify?

It can be difficult to predict how any one company will perform over time. Diversification helps to protect your portfolio by reducing risk.

Index

Reports changes in a specific financial market. (DJIA, S&P 500, etc.)

Risk

The chance of losing all or part of an investment.