please, Please PLEASE diversify!

by Nick on September 3, 2010

We’ve talked a few times about risk and the need to diversify.  But proper diversification is not just to spread your money among asset classes (i.e. stocks, bonds, real estate, CDs, etc.).  It also means to diversify within asset classes.  Owning one stock, one bond, one investment property and one CD is almost always not proper diversification.  (Ten of each may be.)  Or just use mutual funds or ETFs that track each of the asset classes to spread your risk to dozens or hundreds of investments within each class.  That way if one goes wrong you’re not left broke!

A story on CNNMoney yesterday reminds us of this using Harrisburg, Pa bonds as an example.  Yes, Harrisburg, Pa., is defaulting on its bonds.  There’s simply no money to pay the interest. 

The point of this post is not to comment on the Harrison bonds in particular (I don’t know much about them other than what’s in this article) or investing in bonds in general (I like bonds in general and think they belong in almost every portfolio). 

The point is just to give one real-world example where investing a relatively “safer” investment type (bonds) could kill a portfolio if you don’t diversify within the asset class.  If you’re not confident diversifying yourself, stick with a mutual fund or ETF where professional folks do it automatically for a small fee (make sure it’s a small fee of course!).

And, of course, put your credit card down and slowly step away from the mall!

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