Diversification as a Risk-Management Tool

Diversification reduces some investment risk by making sure all of your eggs are not in one basket. Mutual funds, by nature, are diversified investments since they invest in a pool of many different securities. You can further diversify your mutual fund investments by investing in different types of mutual funds. The theory is that when one investment style if “out of favor,” others are likely to be performing better. In this way, diversification can help even out the ups and downs that market swings can cause in your overall portfolio.

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