Anyone you talk to about investments will probably tell you the same thing: “Don’t put all your eggs into one basket!” This cliché simply means that when you are investing, you should not put all of your money into a single company; or a single industry. This technique of investing is called diversification, but there is more to diversification than just following the cliché.

Understanding Diversification

Diversification means that you create an investment portfolio that attempts to reduce risk by using multiple types of investments and investing in more than one company, and within more than one industry.

With a diversified portfolio, when one industry or company fails or takes a large hit; the rest of your investments should be strong enough to weather the storm and help minimize the effects of the loss. Diversification reduces your overall risk. On the other hand, if all of your money was invested into the stock of a single company and the company doesn’t succeed, your investment portfolio and net worth is going to take a huge hit and decrease alongside the value of the stock. Additionally, if you invest in multiple companies that are all within the same new technology sector and that particular technology doesn’t take off- your pocket will feel the pain of a failed technology and you may lose your investments!

An improved method of diversifying an investment portfolio involves investing in more than just company stocks. If your investments are varied, and include stocks and bonds, company sponsored retirement plans, high interest savings accounts and cash for example, you will have a strong balance between high risk and medium risk investments.

For young investors, it is usually a better strategy to invest in more high-risk stocks, and be somewhat of an “aggressive investor”. This is because you have more time before you need your investments for retirement, and theoretically, the money invested has more time to recover if it should take a few hits. A young investor might have an investment portfolio that contains 80% stocks and 20% bonds, while someone closer to retirement would be more conservative and perhaps have the opposite investment mix. Regardless of your age and whether or not you decide to be aggressive or conservative with investments, a diversified portfolio will reduce risk and a combination of investment types will create a well-balanced investment portfolio.

Easy Method for Diversifying Your Portfolio

For both individuals with small amounts of money to invest and those who want the most uncomplicated path to a diversified portfolio, “a single balanced mutual fund” might be a good solution.

Single balanced mutual funds contain a mixture of stocks and bonds already, so the investor simply makes investments within the single fund to create a diversified portfolio.

If you are an individual who enjoys selecting your own stocks and bonds from various companies and industries- you are not going to be satisfied with the single balanced mutual funds as the actual investments within the fund are chosen for you. But for individuals who want to invest but don’t know what to invest in, these funds are the perfect solution!

For individuals with large sums of money available for investing, a single balanced mutual fund is likely not the best option, either. Large investors should minimize capital gains taxes by selecting investments that can assist you in developing reliable streams of income.

Further Diversification

One way to further diversify your investment portfolio is to extend your investments beyond stocks, bonds, retirement funds and cash. For example, you can have investments in real estate trusts, or hedge funds.