Diversification is a strategy designed to reduce risks in an investment portfolio. It entails combining a variety of asset classes--such as stocks (large, middle, and small capitalization as well as domestic and international), bonds, cash, and real estate--to minimize overexposure in any particular market. Volatility, or the measure of the tendency of a market or security to rise or fall sharply within a period of time, is limited by the fact that asset classes do not move in tandem. With each asset class represented, a sharp downturn in any one category will minimize overall losses.

 

Although diversification is no guarantee against loss, most investment professionals agree it is the best way to reach your long term investment goals while at the same time minimizing risks.