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Funds 301: Mutual Funds: Why Diversify?

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1.
If you want to try to limit short-term losses, buy _______.
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A money market fund. Very short-term investments, such as money market funds, are generally considered the safest investments outside of an FDIC-insured deposit. Sometimes even the best-diversified portfolio loses money.
2.
Which statement is false?
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Diversification can ensure that you never lose money. You often get better short-term results as you are likely to own something that is doing well. Diversification lowers long-term volatility as different investments move in and out of favor. But diversification doesn't mean you'll never lose money.
3.
When it comes to mutual funds, you should own _______.
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Maybe neither. There are no 'must-own' types of funds; assembling a portfolio of mutual funds is a matter of personal taste and personal goals. However, be aware of your options so that you can appropriately choose what you should and shouldn't own.
4.
In investing, diversifying means _______.
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All of the above. All of these answer choices describe diversification.
5.
What does diversifying by asset class usually mean?
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Owning a mix of stocks, bonds, and cash. Owning multiple companies is diversification by investment, while owning a mix of growth, value, and international stocks is generally seen as diversification by subasset class.