Safety in Numbers: Why Diversification Matters*

Think of investing as a venture into uncharted territory — but you need to pack well in order to strive for success. Don’t rely on a single fund to pursue your investment goals. Rather, build your portfolio with a selection of funds designed to work together.

This process — dividing your investment dollars among different types of investments — is called diversification. The theory is based on the concept that asset classes tend to react differently to market conditions. With a diversified portfolio of investments, you may help reduce the risk that a loss in one asset class will drag down your entire portfolio.

Diversity Within and Among Asset Classes
To diversify your employer-sponsored retirement plan portfolio, select a mix of investments that are not too similar but that will pursue your overall objective adequately. First, try diversifying among different asset classes, such as stock funds, bond funds, and money market funds. In a volatile year like 1998, this might have been a good strategy. The accompanying chart shows how diversifying your portfolio with stocks and bonds helps reduce risk.*

Second, consider diversifying within an asset class, such as stock funds. For example, if your primary objective is growth, you might choose to invest the majority of your money in a “blue-chip” stock fund and a small-capitalization stock fund.

You may also have the option of diversifying your portfolio with foreign investments. Foreign investments make up more than half of the world’s market, so if you’re not investing overseas, you may be limiting your opportunities. Because U.S. markets may not move in lockstep with some overseas markets, foreign investments may be a good way to diversify.

Foreign investing involves additional risks, however, including the risk of currency fluctuations, political upheavals, and higher taxation. Investors should carefully consider their ability to take on such risks before investing overseas.

Sometimes More Is Too Much
Diversification is often described as putting your eggs in different baskets. The combination of “baskets” you choose depends on your goals, time frame, and risk tolerance. Long-term investors may choose more stocks funds, while shorter-term investors may select a more conservative mix weighted toward bond and money market funds.

No matter what combination you choose, make sure each fund plays a specific role in your overall objective. In investing, more is not always better — strategic diversification is the key.

©2004 Standard & Poor’s Financial Communications. All rights reserved.