What is diversification?

One of the most important ways to lessen the risks of investing is to diversify your investments. It's common sense: don't put all your eggs in one basket. If you buy a mix of different types of stocks, bonds, or mutual funds, your overall holdings will not be wiped out if one investment fails. If you had just one investment and it went down in value, then you would lose money. But if you had ten different investments and one went down in value, you could still come out ahead.

Suggested student activity

  • Ask students: what would you have in a diversified portfolio? Does it make sense to buy stock in big companies and small companies, and companies in different industries? Students can pick stocks, bonds, and mutual funds that would make their holdings diversified.