The Benefits of Diversification
We all know the saying, “Don’t put all of your eggs in one basket.” Experienced investors know this to be particularly important. Since 1929 the market has averaged a return of 10% per year, but during that same time there have been many companies that, though once promising, have gone out of business. The way to protect yourself from the ups and downs of individual stocks is through diversification. By holding a diversified portfolio you insure that no one company will determine the success or failure of your investment plans.
Most stock mutual funds hold stock in a large number of companies offering the individual investor a degree of diversification they could not achieve on their own. That is why mutual funds are safer investments when investing for the long term. As you build your portfolio, however, you may want to diversify further by selecting mutual funds that have different objectives or styles. You can find out about the objective of a fund by reading the fund profile or the fund prospectus.