Definition: The collection of different investments, such as stocks, bonds, and commodities, that a person or company holds. This spreading out of money, called diversification, reduces risk and is the primary goal of building a portfolio.Example: Jim inherits $100,000. He develops and carries out a plan to invest $50,000 in stocks, $30,000 in bonds, $10,000 in gold, and $10,000 in an interest-earning bank account.
Investeach explains: Investing can be very risky. One of the ways we can reduce risk is to follow the advice we learned in elementary school: Don’t put all your eggs in one basket. Stocks, bonds and commodities are different “classes” of investments. They don’t all move up and down at the same time or to the same extent. Jim can achieve further diversification by investing in the stocks and bonds of companies based in different areas of the world because not all economies will perform the same way at the same time.
Riddle me this:
1. What is the primary goal of a portfolio?
2. What’s another name for investments that are fundamentally different from each other?
3. How can a person achieve greater diversification with his stock investments?
Related terms: Asset class, Diversification.