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Plan Well, Retire Well

Saving and investing your money
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The chicken ran under your feet -- do you care?

Don't put all your eggs in one basket. While this might make sense if you're a farmer, why would you care? The mental image of losing all your eggs when you trip over a running chicken can help you remember the importance of diversification with your investment portfolio.

Diversification is an important investment strategy; it helps us manage business and market risk. Let's suppose that Susie Q wants to invest in technology. Clearly choosing to invest in only one tech company would not be a diversified portfolio. If something bad happens to this company (for example, poor management leads to the company failing), then Susie Q would lose all of her investments. To help manage business risk, people choose to invest in more than one company.

What if Susie Q invests in several tech companies such as Dell, Apple and Sony. Does she now have a diversified investment portfolio? No – if something happens to this market sector, and tech stocks as a group lose value, her portfolio will suffer significantly.

To have a diversified stock portfolio, Susie Q will invest in a variety of businesses types such as stocks in pharmaceticul, agribusiness, aerospace, automanufacturing and technology. (Caveat: this is a hypothetical situation; this does not mean you should run out and buy stock in any of these sectors today.) Mutual funds can help people diversify their investments by investing in many companies in different market sectors.

To summarize, diversification in your investment portfolio can help you manage the risk of one company failing (business risk) and the risk of a particular industry doing badly (market risk). To learn more about diversification, visit the "Choosing Investments" section of the Plan Well, Retire Well website.

Bonus Question: If you own a significant amount of your company's stock in your investment portfolio, are you diversified? Think of it this way, if your company fails (which you likely think won't happen, but imagine that it does) and you lose your job AND your investment portfolio's value goes down, were you diversified?

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