Why Should I Diversify My Portfolio?

Key Takeaways

• Portfolio diversification is making sure that you’re spreading out your risk by investing in more than one thing.
• Mutual funds, exchange-traded funds, and target-date funds give you instant diversification.

Katherine: It’s great we get free coffee here, but I do miss the days when we got free lunch.

Carole: Now that you mention it, I actually know how you can still get a free lunch.

Katherine: How?

Carole: With your portfolio. Diversification is one of the few “free lunches” in investing.

What Is Portfolio Diversification?

Katherine: That’s not exactly what I was getting at, but now you have my attention: Why would I want to diversify?

Carole: Diversification is simple. Basically, you’re just making sure you’re reducing your overall risk by investing in more than one thing.

Katherine: OK, but with how the market’s been, I just don’t want to set up my portfolio to fail.

Carole: So, here’s the thing. Diversification won’t help in every market, and it doesn’t pay off right away. But it can reduce overall risk while helping you achieve the best return over the long term.

How Should I Diversify My Portfolio?

Katherine: I just want to keep it simple and make it through the bear market. Where would I start?

Carole: Mutual funds, ETFs, and target-date funds give you instant diversification. You can even take it a step further by investing in different asset classes and investment styles. But keep in mind, these investments all behave differently. So, while one may be up, another may be down.

Katherine: I’m worried about rising interest rates and inflation. Could this help with that?

Carole: Let’s be real here: Investors are always facing some sort of risk. But for long-term investors, diversification is worth a shot.

Katherine: OK. Can we go get lunch now?

Carole: Definitely.

Check out The Short Answer series for more from Carole Hodorowicz and Katherine Lynch.