Diversification: The healthy diet for investors
Do you eat just one kind of food for breakfast, lunch, and dinner every single day? Probably not. Most of us eat a wide variety of foods to be healthy, whether it's a mix of grains, fruits, nuts, vegetables, meat, dairy, or whatever.
The same goes for investing. As a rule, investors are told it's wise to spread out their risk by putting money into a combination of investment types—like stocks, bonds, and different types of funds. This combination is your asset allocation, or your investment diet, if you will. This is just one way to diversify your investments.
There's a second important part of diversification. Beyond the different investment types, it's also wise to diversify the types of companies, industries, and business sizes you invest in too. This is a way to decrease your risk even further when a particular company, industry, or business class performs poorly. It's a step you may already take in your everyday life. When you go out to dinner, do you go to the same restaurant every weekend? Or do you switch things up by going out for pizza one time, burgers the next, falafel here, and tacos there? Why don't you go to the same place every single time? Because diversification. That's why.