Investing money is one of the best ways to build wealth over the long run. However, putting all your eggs in one basket is risky. If that investment goes south, you could lose a big chunk of your money. That’s why diversifying your investments is so important.
Diversification means spreading your money across different investment types, sectors, and companies. When the value of one investment goes down, the value of another may go up. This helps ensure your money is protected and working for you even when parts of the market are volatile.
The three main types of investments are stocks, bonds, and cash equivalents like savings accounts and certificates of deposit. A well-diversified portfolio will include a mix of all three. For the stock portion, invest in a variety of companies across different industries like technology, healthcare, financials, and consumer goods.
Bonds also provide diversification since they generally move differently than stocks. Consider government bonds, municipal bonds, and corporate bonds. Government bonds are very low risk, while corporate bonds offer higher yields. A good rule of thumb is to allocate your age in bonds, so if you’re 30, 30% of your portfolio could be in bonds.
Cash provides stability and liquidity, so keep some money in a high-yield savings account for emergencies and short-term needs. The rest of your cash can be invested in CDs to generate slightly higher returns.
Diversifying within accounts is also important. Don’t put all your retirement money in stocks or all your taxable money in bonds. Spread investments across all your accounts—taxable, retirement, brokerage—to maximize tax efficiency and financial security.
Rebalance your portfolio periodically to maintain your target allocations. If part of your portfolio has gained or lost a lot of value, sell some investments and buy more of others to rebalance. This discipline helps ensure you’re not taking on too much risk.
Diversifying globally provides more opportunities and protection. Consider investing in international stocks, bonds, and real estate in both developed and emerging markets. Currencies and economies around the world move in different cycles, so global diversification reduces risk.
With some time and research, you can build a robust, well-diversified investment portfolio. Start with a simple three-fund portfolio, then add other investments as you learn more. Diversification is a proven strategy that leads to better long-term returns and a more secure financial future. Sticking to a plan and rebalancing when needed will serve you well for years to come.
