The Meaning Of Diversification

Sharon wants to know what Dave means when he talks about diversifying investments. Dave explains.

QUESTION: Sharon on Twitter wants to know what Dave means when he talks about diversifying investments. Dave explains.

ANSWER: I have a lot of mutual funds with one or two mutual fund companies and several mutual funds within those companies. They’re called fund families. It’s like a brand of soup, like Campbell’s has all kinds of soup. Then different fund companies or fund families have that, and I think I operate primarily in two families and then several mutual funds within each family. I have money in different banks. I have money in different money market accounts. I have money in different types of real estate. So I’ve got several different kinds of investments, and I’ve got several different brands of investments, but not eight million. I could list them out, and the list wouldn’t even fill one page. It’s not too complicated. I want to keep things fairly clean and fairly simple.

Generally speaking, when you’re diversifying your mutual funds, then you would spread it across four types: growth, growth and income, aggressive growth, and international. Diversification simply means to spread around. That’s all it means. Spreading your money around lowers your risk because you’re not placing all your bets on one horse in the race. You’re betting on a bunch of different horses, although this is not gambling. You’re not going to lose everything if that one company goes broke. It’s why I tell you not to put all your money in your company stock as well.