Managing Investment Risk - Diversify

When you invest, you make decision; in determining those decision, you consider what your goals are for the investment, your time horizon, your risk tolerance and diversification. But putting all of your money into one investment isn't wise.

After take into consideration of risks, rewards, and time horizons. Next is diversification. When you invest, you make decision; in determining those decision, you consider what your goals are for the investment, your time horizon, and your risk tolerance. But putting all of your money into one investment isn't wise. If that investment goes up, you're happy, but if it goes down, you're not happy---and worse, you could be broke.

Don't to put all of our eggs in one basket . Don't put all your money into one investment. You want to spread your money around, and by doing so, you spread the risk of loss.

Spreading your investment dollars among different asset classes is referred to as "asset allocation." You are allocating your assets. The asset classes are stocks, bonds, cash, and real estate. You can break these down even further. For stocks, you can break it down to domestic (U.S.) and international, and then you can look to include large company stocks, mid-size companies and small companies to further diversify the equity portion or your portfolio. Bonds, well, you might want some corporate and government bonds. Corporate bonds usually pay a higher interest rate. Real estate could be the home you live in or a rental property.

Stocks and bonds usually have an inverse relation. If stocks are up, bonds are down. Real estate values are usually up when stocks are up and interest rates are down. So if you have your money spread around, part of your portfolio will always be doing well. You want to create a balance between asset classes. A balanced portfolio consists of stocks and bonds and cash.

Over long periods of time, stocks have outperformed bonds. If we take into consideration taxes and inflation, stocks are the only investment that has beaten them both.