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Section 4
Failure to Diversify
Diversification is one of the most important factors in limiting
financial risk. You need to spread your wealth across a variety
of investments, so that a downturn in one sector of the stock
market, the economy, or one particular stock isn’t devastating
to your investment portfolio.
This sounds like common sense, but I see this basic rule
of investing violated time after time when I meet with new or
prospective clients. Many 401(k) plans offer company stock
as part of the investment offerings in the plan. Since 401(k)
plans have become commonplace over the last 30 years, many
investors end up with a large part of their retirement portfolio
invested in just one stock.
Diversification is important because market conditions and
the economy change over time, and some investments in your
portfolio will outperform others. Diversification will also smooth
out some of the volatility in your portfolio in a down market or
bad economy.
Chapter 4: The Most Common Investor Mistakes
