Diversification 101

Investments fall into just five broad categories--and each can have a role in your portfolio.

DIVERSIFICATION 101

Lesson 1: The Right Baskets

For many people, the most befuddling aspect of investing is the concept of diversification--the process of dividing your money among different investments to boost possible returns while reducing the chance of losing everything in a single market reversal.

DIVERSIFICATION 101

Lesson 2: Your Emergency Fund

The purpose of safety-net investing is to make sure you have the money you need when you need it for an emergency or for a financial goal that's right around the corner.

DIVERSIFICATION 101

Lesson 3: Protect Against Inflation

For some people, the goal of investing is not so much getting ahead as it is not falling behind. Because inflation marches forward each and every year, the fear is that your buying power will diminish if your investments don't appreciate as quickly as the cost of what you buy.

DIVERSIFICATION 101

Lesson 4: Depending on Income

At some point in your life--perhaps after you retire, perhaps sooner--you'll want at least a portion of your investments to generate income. That income can be used to supplement your wages, Social Security or pension, making your life more comfortable. And it can create a financial cushion in your investment portfolio, ensuring that no matter what happens to the value of your principal, you'll be earning some money on your investments.

DIVERSIFICATION 101

Lesson 5: Your Future in Stocks

The main reason people save and invest is that there is something they want that they can't afford today--a new car, a new house or a comfortable retirement, for example.

DIVERSIFICATION 101

Lesson 6: Making Decisions

If you've read this entire series on diversification, you've thought about what each investment category is for and how much money you want to dedicate to each type of investment. Now it's time to formalize your plan, plugging in just how much money and what percentage of your assets you'll have in each.

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