Owning different types of investments allows you to reduce your exposure to one particular investment or risk.
Diversification does not make you more money; it simply means not putting all of your eggs in one basket.
In a diversified portfolio, you hold different types of investments so that if there is a downturn in some investment categories, you have other ones that can help cushion the impact.
Some products can be higher risk than others, so by combining several different investments in your portfolio, you can generally reduce the overall level of expected risk.
Choose the Right Asset Mix
The asset mix you choose is important to the overall risk and expected returns of your portfolio.
The three basic categories of investment products or assets are: equity investments, fixed income investments, and cash or cash equivalents. There are other types of investments that can added to the mix, such as a promissory note or a real-estate based investment.
An investment advisor will allocate different percentages of these asset classes to meet a client’s investing goal. For example, a growth portfolio will generally hold a higher percentage of equity investments than fixed income or cash equivalents. Your investment advisor can explain how different products fit into a diversified portfolio.
Before selling you an investment, your investment advisor must work with you to understand your financial situation and risk profile. They must also recommend products that are suitable to you and provide information about the costs and performance of your accounts.
Go to our Working with a Registered Investment Advisor section to learn more about working with an investment advisor and the responsibilities both you and your advisor have in managing your investments.