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Why diversification matters
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Diversification means not putting all of your eggs in one basket.

As an investor diversifying means owning different asset classes such as:  large U.S. companies, small U.S. companies, companies overseas and bonds, etc.

Asset classes tend to perform differently over a given period of time.  For example when large U.S. stocks are performing well, international or small U.S. stocks may not. 

The Callan chart illustrates the importance of diversification by giving distinct asset classes different colors and ranking their annual returns by calendar year.  Click here for an enlarged Callan chart.

In other words, you can see which asset class won the "horse race" from January 1 to December 31 of a given year. 

For purposes of this exercise, it is does not matter which asset class is which or who even "won" in any given year--what is important to note is that the "winners" rotate. 

Often one year's "winner" is a "loser" in a following year.

Poor performance of an asset class equals opportunity for the savvy investor who rebalances his or her portfolio!

 

<NEXT: Rebalancing>

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