Portfolio Diversification: Risk Management Essentials
Diversification is the closest thing to a free lunch in investing. By spreading your investments across different asset classes, sectors, and geographic regions, you can reduce risk without sacrificing long-term returns. The key is not putting all your eggs in one basket.
A well-diversified portfolio typically includes domestic and international stocks, bonds, and potentially alternative investments like real estate investment trusts (REITs). The classic rule suggests holding your age as a percentage in bonds - so a 30-year-old might hold 30% bonds and 70% stocks.
Rebalance your portfolio periodically to maintain your target allocation. When one asset class performs particularly well, it may grow to represent a larger portion of your portfolio than intended. Selling high-performing assets and buying underperforming ones helps you buy low and sell high systematically.
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Quick Facts
- Reduces risk without sacrificing returns
- Spread across asset classes and regions
- Age-based bond allocation rule
- Rebalance annually or when needed
- Don't put all eggs in one basket