Diversification

KS-Putting-All-Your-Eggs-in-One-Basket

Regardless of whether you’re investing in a retirement account or in an investment account, you should always diversify.  Diversification in its simplest terms means NOT putting all your eggs in one basket.  So putting all your money in Google’s stock…bad idea.

Here is an example of what is and what isn’t diversification:

Let’s say you have $100,000 to invest.  If you invest $50,000 in McDonald’s stock and $50,000 in Wendy’s stock.  That is not really diversifying even though you own 2 different stocks because both of them are fast-food companies.  If everyone decided to give up fast-food, both McDonald’s stock and Wendy’s stock would go down and your entire portfolio (account) would lose a lot of money.  You probably would’ve lost just as much money as someone who put all $100,000 in McDonald’s stock (i.e. “put all their eggs in one basket”).

But let’s say you put $50,000 in McDonald’s stock and then $50,000 in Target stock instead.  That would be considered diversifying because the two companies are not in the same industry.  If the fast food industry was going down, your portfolio will still lose money but not as much as someone who had all their money in McDonald’s and/or Wendy’s.

So as a rule of thumb, the less your stocks relate to one another, the more diversified you are.

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