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Finance For Dummies

Finance For Dummies offers personal finance information on investing, retirement investing, finance, insurance, credit cards, loans and more. Personal finance education is our goal.

Wednesday, July 19, 2006

Stock Diversification Through Mutual Funds


Diversification is essential to investing mainly because it lowers your company risk. It does not eliminate risk, but there is a correlation to having more stocks in your portfolio and having lower company risk. When you limit the number of securities you increase your level of risk while not receiving the benefit of higher returns. Investment tools like mutual funds typically have scores of stocks inside their portfolio. Because of this mutual funds are very useful to investors.

Most Americans cannot just go out and buy 100 stocks. Therefore, the use of mutual funds can help the individual investor greatly because these funds have millions and millions of dollars to invest in hundreds of stocks.

Mutual funds also expose your portfolio to more asset classes and this is very important to lowering the company risk and helping the performance of a portfolio (in general). For example, if you have 100 securities in your portfolio your company risk level is negligible whereas if you own one security your company risk is enormous. Market risk is something you can never get rid of in your portfolio, but limiting the company risk by adding more and more securities will lower your company risk.

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