The markets are coming off a wild week and many financial experts say now is the time to make sure you have a balanced, diversified investment mix.
Understanding diversification and making sure your portfolio meets that standard is an important way to build long-term wealth, personal finance coach Ramit Sethi tells CNBC Make It.
That's good advice, but do you know what it actually means?
At the most basic level, it means you don't want all your money invested in the same place. Instead, you want to set up your investments in a way that when one sector of the market is dipping, you are also invested somewhere else that is performing well.
"You want to have a balanced portfolio so that you're not subject to massive amounts of risk," says Sethi, author of the best-selling book "I Will Teach You To Be Rich." Spreading out your money across several investments is one way to reduce your overall risk so that you won't lose everything if the market tanks.
A balanced portfolio generally means your money is invested in different types of assets, such as stocks and bonds. Bonds typically act as a "counterweight" to stocks, Sethi explains. When stocks fall, bond prices often rise and therefore reduce the overall risk that you'll lose money. You generally want some of both in your investment mix.
Just having stocks and bonds is not enough to keep your risk low, though. You also need to diversify your investments within these asset classes. With stocks, for example, you typically want some of your money invested with big companies, some with international companies and some with small companies.
The same is true with bonds. You want to pick bonds from different issuers, such as the federal government, corporate bonds, and municipal bonds from state and local governments.
Creating and maintaining a balanced, diversified portfolio can take a lot of time and research if you're doing it yourself. Markets aren't static, so even after you set everything up, you'll need to rebalance periodically to make sure that your investments are not drifting off-course.
If that feels overwhelming, you can always work with a professional or invest through so-called robo-advisors, which typically use algorithms to build and manage a portfolio for you.
When it comes to retirement accounts, you can ensure you always have an on-track, diversified portfolio by buying something called a target-date fund. These are a collection of funds that offer "automatic diversification," Sethi says.
"Target-date funds automatically pick a blend of investments for you based on your approximate age," he says. They start off more aggressive and then move to more conservative investments as you get closer to retirement. The fund does the work to make sure you have a balanced investment approach, so all you have to do is add money.
Target-date funds may not be perfect for everyone, Sethi says, but most people will find them to be low-cost, tax efficient and easy-to-use. Otherwise, you'll need to either build and manage the portfolio yourself or seek out professional help.
"If you're nervous about investing and just starting out, your biggest danger isn't having a portfolio that's too risky, Sethi says. "It's being lazy and overwhelmed and not doing any investing at all."
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.