What is portfolio diversification?

If you understand the adage, “Don’t keep all your eggs in one basket,” then you already understand the concept of diversification.

Diversification is a key strategy that can help you build a more resilient portfolio. While all investing involves risk, building a diversified portfolio is important to help:

• Minimize losses,
• Balance market volatility, and
• Position you closer to your financial goals.

It is also a straightforward concept that even beginner investors can implement right away.

Portfolio diversification involves building a basket of investments with diverse assets. For example, your “basket” might include investments in one or more of the three main asset classes:

• Cash (or cash equivalents),
• Bonds,
• Stocks,

—and even alternative assets like precious metals or real estate.

The entire investment holding, aka your basket, should withstand the fluctuating prices of the market as it is distributed across many smaller, distinct types of investments rather than one single investment—limiting your exposure to potential losses.

Due to a vast global market overflowing with opportunities, you can further diversify within each asset class.

A single asset class can consist of several distinct types of securities. You can narrow down your choices by keeping your goals and risk tolerance in mind, and identifying the characteristics you would prefer for your investments.

One straightforward way to diversify without having to research and purchase individual securities on your own is by purchasing mutual funds or exchange-traded funds (ETFs). Many of these funds specialize in a specific sector or type of stock, and adding the fund to your portfolio can quickly give you exposure to instant diversification via hundreds or even thousands of stocks.

For example, E*TRADE can help you diversify with ETFs that align with over 40 economic, technological, and social trends such as:

• Large, mid-sized, and small companies,
• Japan, India, China, and more emerging markets,
• Companies in different sectors, such as space exploration, climate sustainability, and infrastructure.

While it can be tempting to “set it and forget it” when it comes to your portfolio, that is not the best strategy. Instead, check in on your portfolio diversification over time. If one asset class or specific investment outperforms, you may need to rebalance (or make your portfolio more diversified again).

CRC# 3815094 11/2024