The importance of diversification
The importance of diversification
You can’t avoid bear markets as an investor. What you can avoid is the risk that comes from an undiversified portfolio.
Diversification helps protect your portfolio from inevitable market setbacks. If you throw all of your money into one company, you’re banking on success that can quickly be halted by regulatory issues, poor leadership or an E. coli outbreak.
To smooth out that company-specific risk, investors diversify by pooling multiple types of stocks together, balancing out the inevitable losers and eliminating the risk that one company’s contaminated beef will wipe out your entire portfolio.
But building a diversified portfolio of individual stocks takes a lot of time, patience and research. The alternative is a mutual fund, the aforementioned exchange-traded fund or an index fund. These hold a basket of investments, so you’re automatically diversified. An S&P 500 index fund, for example, would aim to mirror the performance of the S&P 500 by investing in the 500 companies in that index.