Diversify your investments

Diversification can be neatly summed up as, "Don't put all your eggs in one basket." The idea is that if one investment loses money, the other investments will make up for those losses. Diversification can't guarantee that your investments won't suffer if the market drops. But it can improve the chances that you won't lose money, or that if you do, it won't be as much as if you weren't diversified.

When determining your asset allocation, consider diversification— the practice of spreading money among different investments to reduce risk. Diversification is a strategy that can be neatly summed up as: "Don't put all your eggs in one basket."

One way to diversify is to allocate your investments among different kinds of assets. Factors or market conditions that may cause one asset class to perform poorly may improve returns for another asset class. People invest in various asset classes in the hope that if one is losing money, the others make up for those losses.

You'll also be better diversified if you spread your investments within each asset class. That could mean holding a number of different stocks or bonds, and investing in different industry sectors, such as consumer goods, health care, and technology. That way, if one investment or sector is doing poorly, you may offset it with other holdings that are doing well.

Some investors find it easier to diversify by owning mutual funds or exchange-traded funds (ETFs). Mutual funds and ETFs are investment companies that pool money from many investors and invest the money in stocks, bonds, and other assets. These funds make it easy for investors to own a small portion of many investments.

But a mutual fund or ETF won't necessarily provide diversification, especially if it is narrowly focused (such as on one industry sector). If you invest in narrowly focused funds, you may need to invest in several to be diversified. In addition, even if you hold several mutual funds or ETFs and think you are diversified, you should check the top holdings of the funds to make sure they are different and provide the diversification you are seeking.