Diversify!

There are three major kinds of assets—stocks, bonds, and cash. If you think of these asset classes as baskets, it’s easy to remember why you should invest in more than one of them—so you don’t put all your eggs in one basket.

The three asset baskets tend to perform differently, so a good way to both protect and grow your money is by investing money in all three baskets. That way, when one basket is having a down year, the other two baskets may be doing better. You might consider working with an investment professional to help you take these steps and diversify your money among these asset baskets.

• Decide what percentage of your money you want to put (allocate) in each basket. Some people subtract their age from 100 to determine how much they will invest in stocks (100 – age 30 = 70 percent in stocks). The rest is spread between bonds and cash, perhaps 20 percent bonds and 10 percent cash. As things change in your life—you get a promotion, have a child, or retire—be sure you still have the right mix of assets for your goals. Seek the help of a professional as necessary.



• Decide what stocks, bonds, and cash investments to buy. Here’s where diversification comes in. Diversification means buying more than one kind of stock, bond, or mutual fund. If you don’t have a lot of money to buy different stocks and bonds, you might consider starting off with a single, diversified mutual fund. There are several ways to get started investing with small amounts of money. Those are explained later in this chapter.