4 Cornerstones Of Diversification
But diversification is the chief tool of this balancing act. It can help you reduce the risks of your portfolio while still pursuing rewards by spreading out your investments over several kinds of assets—an approach that also may lessen the impact of the ups and downs of volatile markets. (Of course, diversification doesn't ensure a profit or guarantee protection against a loss, especially in a declining market.)
1. Domestic stocks: Typically, this is the most aggressive part of a portfolio, likely providing the greatest potential for reward. Historically, stock market investments have outpaced most other kinds of holdings. Nevertheless, the market is volatile and periodically experiences downward spirals, so to take advantage of the potential long-term outperformance of stocks you have to stick to your plan over the long haul. It's the value of stocks when you decide to sell, not what they may be worth during the time you hold them that truly counts.
2. Domestic bonds: Bonds can serve as a counterweight to stocks because the prices of the two kinds of investments sometimes move in opposite directions. Again, there are no guarantees that this will happen or that holding both kinds of assets will have the desired effect. If safety is a primary concern, you might increase your investment in U.S. Treasury bonds or high-quality corporate bonds, which tend to offer less volatility, though with somewhat lower returns. In other cases, you might opt for high-yield bonds with their higher returns and greater exposure to risk.
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