COFFEEHOUSE INVESTOR

Diversify

Don't put all your eggs in one basket. Most would prefer to have all our eggs in the "one basket" - asset class that is performing the best at the time - and unfortunately that is what many investors try to do with miserable results. Let's take a closer look at the importance of diversification in relation to the stock market and your portfolio.

The red line shows the inherent volatility of holding just one stock, mutual fund, or asset class.

The obvious downside to diversification is that you forego the very small chance that you will be lucky enough to invest all your money in the next decade's top stock, fund, or asset class.

In the short run, your diversified portfolio will underperform the hot asset class. In the long run diversification provides us with much less volatility without sacrificing much in the way of returns.

Click on the line to see diversification in action.