Simply put, diversifying means not putting all our eggs in one basket. No investment performs well all the time. When one aspect of the capital markets is down, another tends to be up. Spreading investments across asset classes increases our overall potential return and reduces risk at the same time. Some investors diversify by selecting a number of investments and dividing money equally among them. Once a year, they adjust the mix to maintain that original dollar balance, realizing capital gains from appreciated assets and reinvesting those dollars in the depreciated assets. Although it might sound counter-intuitive to sell some of the best performing investments to invest in the laggards, think of it as selling high and buying low. Diversifying doesn't mean buying equal percentages of everything. It’s more realistic to think in terms of ranges. For example, perhaps stocks make up 60% to 80% of your portfolio, bonds 20% to 40% and cash 10% to 20%. A globally diversified portfolio is intended as guidance for constantly changing capital markets. Our asset allocation should take into account age, income and investment objectives. Another thing about the portfolio: Stocks don’t necessarily mean individual shares. Nor do bonds mean individual issues. Mutual funds or exchange-traded funds are often the best way to own stocks and bonds.
Chris Bryant is an American financial advisor.