Diversification is an investment principle designed to help manage risk. However, diversification does not guarantee against a loss. The key to diversification is identifying investments that may perform differently under various market conditions.
On one level, a diversified portfolio should be diversified between asset classes, such as stocks, bonds, and cash alternatives. On another level, a diversified portfolio also should be diversified within asset classes, such as a diverse basket of stocks.
A Diversified Approach
For example, say a stock portfolio included a computer company, a software developer, and an internet service provider. Although the portfolio has spread its risk among three companies, it may not be considered well diversified since all the firms are connected to the technology industry. A portfolio that includes a computer company, a drug manufacturer, and an oil service firm may be considered more diversified.
Similarly, a bond portfolio that invests exclusively in long-term U.S. Treasuries may have limited diversification. A bond fund that invests in short- and long-term U.S. Treasuries as well as a variety of corporate bonds may offer more diversification.
Mutual Funds and ETFs
The concept of diversification is one reason why mutual funds and Exchange Traded Funds (ETFs) are so popular among investors. Mutual funds accumulate a pool of money that is invested to pursue the objectives stated in the fund’s prospectus. The fund may have a narrow objective, such as the auto sector, or it may have a broader objective, such as large-cap stocks. ETFs also can have a narrow or broader investment objective. Keep in mind, however, the more narrow an investment objective, the more limited the diversification. In addition, a narrow investment objective may result in more volatility and additional risks that are associated with a particular industry or sector.
The concept of diversification is critical to understand when you are evaluating a portfolio. If you want more information on diversification, or have questions about how your money is invested, contact Member Investment Services, located at DuPont Community Credit Union where you can schedule a free appointment by emailing firstname.lastname@example.org or calling 540.946.3200.
Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money. Shares, when redeemed, may be worth more or less than their original cost.
Securities offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SPIC. Insurance products offered through LPL Financial or its licensed affiliates. The investment products sold through LPL Financial are not insured DuPont Community Credit Union deposits and are not NCUA insured. These products are not obligations of the DuPont Community Credit Union and are not endorsed, recommended or guaranteed by DuPont Community Credit Union or any government agency. The value of the investment may fluctuate, the return on the investment is not guaranteed, and loss of principle is possible. DuPont Community Credit Union and Member Investment Services are not registered broker/dealers and are not affiliated with LPL Financial.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.