Diversification. It’s one of those words that you hear thrown around by financial types, but too often no one slows down enough to explain exactly what it means.
Diversification is a risk reduction tool. What do I mean by that?
By their very nature, investments are risky. The value of any single investment can go down dramatically due to any number of circumstances. But when you spread that risk around by having different kinds of investments, your risk of losing money over the long term is greatly reduced. Not eliminated, but reduced.