When financial advisors speak of diversification in your investment portfolio, what are they talking about? Ever hear the expression "don't put all your eggs in one basket?" That basically sums it up.
If an investor puts all his or her money into one type of asset—say, stocks—any negative change in the fortunes of that type of asset could be devastating.
So you want to diversify. That doesn't mean, for example, buying stock in 20 different technology companies. It does mean, rather, spreading out risk by having not only those tech firm stocks in your portfolio but also large cap stocks, small cap stocks, bonds, real estate and cash. If one of those asset classes isn't doing well, the others will help cushion any blow. What's more, if all your assets are doing well, that probably means you need more portfolio diversification.
Certified financial planner Mark Cortazzo, senior partner at Macro Consulting Group, explains.