Putting all your eggs in one basket is a bold move. If that basket does well, you do well. But, if that basket flunks, you lose all those eggs. Rather than investing in just one or a few focused but similar stocks, portfolio diversification is an investment strategy that mixes up your money.

You can diversify your portfolio in different ways:

  • By Asset Class: Diversify across asset classes, such as in stocks, cash (treasury bills, CDs, money market

  • securities, etc.), bonds, ETfs, real estate and commodities, too.

  • By Type of Stock or Bond: Purchase various types of stocks and bonds, like dividend-paying stocks, aggressive growth stocks, blue-chip companies, startups, U.S. Treasury bonds, TIPS, state and municipal bonds, investment-grade corporate bonds, high- or low-yield corporate bonds and more.

  • By Sector: Move some of your capital into various industries like tech, healthcare, manufacturing and more. In case one experiences extreme volatility, your whole portfolio won’t plummet.

  • By Market Capitalization: Market capitalization refers to how much companies would have to pay should they purchase all stock back from shareholders. Diversify your portfolio by small-, mid- and large-cap companies.

  • By Correlation: Some stocks have histories of performing in unison together. Invest in assets that aren’t correlated so, if one moves south in the market, the others won’t necessarily follow suit.

  • By Risk-Reward Ratio: Select securities with varying risk-reward ratios—the dollar amount that you earn against the risk of your investment. Your overall portfolio, if well-diversified, can override the risks of individual securities.

While there’s no one right way to diversify a portfolio, most advisors will suggest the 5/25 rule: No more than 5 asset classes at once, and no more than 25 percent of the whole portfolio in any one asset class. However you choose to do it, a well-diversified portfolio tends to perform better over time—particularly over a period of 25 years or more. By spreading out your investments, inevitable market volatility won’t hit you as hard.

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