Step 6: Diversification & Asset Allocation

And just look at the historical performance! The advantages are clear. This picture shows only a few months, during a horrible period of American stock market history. The infamous 'tech bubble' wiped out many stockholders' investments during that time, yet if they only had properly diversified their investments over this same period of bad market performance, they would have come out ahead! (And the well-diversified ones actually did!)

Correlation

Correlation is also an important concept to note. Correlation is a technique that a good fund manager will use to make sure that a fund is safely diversified, using one type of stock against another because they are "seasonally active," or otherwise work well against each other.

Correlation = Additional safety.

Notice how the stocks are in the second example above seasonally balanced against each other so the positives of one outweigh the negatives of the other? Your fund manager chooses not only bonds to correlate with your stocks, but the stocks themselves to correlate against each other by seasonal or other reoccurring cycles. This can be taken further, too. The different funds in your portfolio could correlate with each other by weighing a tech-heavy fund against a fund weighted in traditional services, for instance. Properly correlating your portfolio on all the different levels is not easy though, and even a Zen master might find it a challenge. I would personally search for a world class bank's Financial Advisor who truly enjoys the challenge of weighing the funds against each other, after picking the well-correlated and diversified funds in the first place.

Onward to Step 7: Decide on your Investment Vehicles