Identification

• Diversification relates to asset allocation strategy that combines varying levels of stocks, bonds and cash within one investment portfolio. Commodities, real estate and derivatives are alternative investments that increase diversification.
  
  

Benefits

• Diversification is intended to manage the wild fluctuations in price associated with the stock market and individual investments. Furthermore, diversification allows for higher returns over inflation than certificates of deposit and bonds.
  
  

Considerations

• Proper diversification strategies are dynamic, and vary according to your personal risk tolerance and time frame towards particular goals. For example, savers approaching retirement will favor portfolios that feature larger proportions of bonds. Conversely, young savers prefer to invest for growth---with higher weightings for stocks.
  
  

Misconceptions

• Simply owning several different stocks and bonds does not equate to perfect diversification. Investments should cover multiple industries and geography, so that different portions of the portfolio are profitable at each point during the economic cycle.
  
  

Risks

• Diversification cannot counter systemic risk. Systemic risk describes the collapse of the entire financial system.