Diversification and Asset Allocation

The ability to properly diversify your funds, and your whole portfolio as well, is the single most important step in creating both safety and growth. If we had to point to one of these 10 steps and say that one was the most important to achieving your goals, this would be it.

Diversity in all things, I feel, is good. But when a fund is expertly crafted using the proper amounts of Stocks, Bonds, and Cash assets to achieve your goal, it can be so much safer and more profitable than any other investments you could possibly make.

The best fund managers, who work only for the world-class banks that have a chair on the stock market, have the most expertise in balancing funds to work their hardest. Look at the charts below to see how Diversification can work for you.
Diversification of 6 assets in a portfolio

Think of this chart as your portfolio, with six funds in it. (Some are Pre-existing, and some you've added since you read this.) One fund is built out of nothing but some treasury bills that you came across once at a great rate. Another is comprised solely of Stocks, and a third is only made of municipal bonds. (Which you kept for their tax advantage.)

This is obviously a very conservative portfolio, to say the least, however it clearly shows how you should spread the purpose of your investments throughout your different funds for safety. The three mixed funds in the middle represent funds that managers have mixed well-proportioned stocks, bonds, and cash to already. This strategy allows you to keep some of your existing investments such as the munis or the T-bills, and plug them into the proper proportion with the rest of your portfolio.

Proper proportions = Safety.

 Diversification saved these investors from the tech bubble!

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