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A key to managing risk is to spread your investable dollars over a variety of investment types — because different kinds of investments perform better at different times. While this strategy cannot guarantee against a loss, it is one of the best ways to help you reach your goals and minimize risk.
To seek diversification, most experts recommend that you spread your investments among many different asset classes —cash, stocks, bonds, mutual funds, real estate, or perhaps alternative investments — as well as industry, style and country. By picking investments with diverse characteristics, you can help ensure that if one drops in value it will be balanced out by others that are performing well.
How many investments do you need to be adequately diversified? Opinion varies greatly. Early studies generally found between 10-20 stocks was optimal, however more recent studies indicate that increased market volatility has led to a greater need for diversification: the number of stocks can range from 55 to more than 110 in times of market distress.*
For the average investor, managing a portfolio of over 100 stocks is beyond their reach — either because of the lack of time, experience or resources. Further, while it's important to diversify broadly, it’s important to know what you own so you can avoid a lot of overlap. Many investors turn to mutual fund portfolios that are researched and actively managed by professionals to achieve diversification, but be careful you don’t invest in similar funds holding the same types of stocks — diversification at the fund level still holds true.
Investors should consider the investment objectives, risks, charges, and expenses of a mutual fund carefully before investing. Download a prospectus, or summary prospectus, if available, that contains this and other information about the fund, and read it carefully before investing.