"Don't put all your eggs in one basket" is the core principle of diversification. By spreading your investments across different asset classes, you can reduce the impact of a poor performance in any single investment.

What is Asset Allocation?

Asset allocation is how you divide your portfolio among different asset categories, primarily stocks, bonds, and cash. A common starting point for a young investor might be 80% stocks and 20% bonds. As you get older, you typically shift more towards bonds to reduce risk.

Easy Diversification with Index Funds

The easiest way to diversify is to invest in broad-market index funds or ETFs. A single S&P 500 index fund, for example, gives you ownership in 500 of the largest U.S. companies.