What is diversification?
Diversification is a strategy where you spread the money you’re investing across different types of investments. Think of it as not putting all your eggs in one basket.
Is there an easy way to diversify?
There are a couple of fund types that can help to diversity your portfolio.
- Mutual fund – Your money is pooled with other investors with a similar goal so you have greater buying power than you would on your own.
- Exchange-traded funds (ETFs) – These are similar to mutual funds where they represent diverse investments, but ETFs are bought and sold throughout the day. They may be less expensive since they are not actively managed like a mutual fund, but brokerage commissions may occur when you buy or sell.
Are other fund types available?
- Bond funds invest in different types of bonds (government, municipal, and corporate) and the risk may vary based on the goal of the fund.
- Stock funds invest primarily in stock companies, again, the risk may vary based on the goal of the stock fund.
- Hybrid funds invest in more than one type of investment.
The Just the Facts: Investing worksheet presents some great visuals to help you understand and decide how to invest.