Diversification

Diversification attempts to lower risk in a portfolio by investing in various investments in an asset class and perhaps investing in various asset classes.

Proponents of diversification believe this lowers risk and exposes the individual’s portfolio to maximum opportunity. Critics believe that while diversification can avoid the risk of a concentrated portfolio, it does not avoid systematic risk and it gives the individual average returns over the long run.

Buying a mutual fund usually gives the investor automatic diversification within an asset class. Some mutual funds may be more diversified than others, and others may be more concentrated in a specialized field, e.g. small cap growth.

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