Seeking Diversification
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Seeking Diversification
Whether you’re investing for a goal that’s five or 50 years away, it would be wise for your first stock fund to be well diversified. That may mean you should consider a fund that holds a large number of stocks (100 or more) from a wide range of industries, or sectors. By looking at a source such as Morningstar.com, you can find how many stocks a fund owns as well as which sectors it favors.
Things To Know
- Diversified funds are generally more stable than concentrated ones.
Why diversify?
What’s the big deal about diversification? Funds that own many stocks from many different sectors are generally more stable than funds holding few stocks from only one or two industries. For example, the average technology fund carried a standard deviation (a measure of volatility) of 43.4 recently, while the average large-blend fund’s standard deviation was a relatively sedate 17.1.
While you may own some of these more concentrated types of funds at some point in your investment life—say, to attempt to rev up your returns or to add some variety to your investments—they aren’t suitable first-time investments for most of us.