You have probably heard that diversification is a key to investment success. So, you might think that if diversifying your investments is a good idea, then it might also be wise to diversify your investment providers — after all, aren’t two (or more) heads better than one?
Before we look at that issue, let’s consider the first half of the diversification question — namely, how does diversifying your investment portfolio help you?
Diversifying your portfolio
Consider the two broadest categories of investments: stocks and bonds. Stock prices will move up and down in response to many different factors, including good or bad corporate earnings, corporate management issues, political developments and even natural disasters. Bond prices are not immune to these dynamics, but they are usually more strongly driven by changes in interest rates.
“We know doing the same thing and expecting different results is the very definition of insanity, yet many sit on the sidelines while big issues circle around us. Consider our big issues: housing, transportation and workforce development. These issues have been forefront for 40-plus years and while we have made some progress we’re still pushing the boulder uphill with plenty of work to be done.”
To illustrate: If your existing bond pays 2 percent interest, and new bonds are being issued at 3 percent, then the value of your bond will fall, because no one will pay you full price for it. (Of course, it may not matter to you anyway, especially if you planned to hold your bond until maturity, at which point you can expect to receive your full investment back, providing the bond issuer doesn’t default.)
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