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    1 Reply Latest reply on Oct 1, 2010 9:39 AM by LUCKIEST

    Diversification

    Freemarkets Newbie
      How do you know if your porfolio is truly diversified? Does just owning a bunch of stuff, stocks bonds, mutual funds, etc. mean you're diversified? How about owning 5 or 10 different mutual funds?

      Most investors think that if they do that, they are diversified. Not so. A problem with a lot of mutual funds is that their top holdings are the same as other funds. Another problem with a lot of actively traded mutual funds, is style drift. What's that? Well, let's say a mutual fund is considered a large cap "growth" fund, but when small cap value takes off, they start buying small cap value stocks to add to their performance. As long as they keep enough stocks to be considered large cap growth, they can get away with it. Now you ask why should you be concerned with that. Well, you're not getting what you paid for.

      To be truely diversified you should look at true "Index" funds. They are low cost or no-load, they are not activley trading stocks in the portfolio and stay with the stated index they are labeled for. You may think owning the S&P 500 Index is enough. It is mostly large cap stocks. You need to buy index funds across the board: Large cap growth and value, Small cap value and growth, International indexes, large cap value and growth, emerging markets, small and value, for bonds use 1 year and 5 year Treasury notes, maybe inflation protected bonds.

      By diversifying in this matter you help reduce risk and volitility. When one index is down, usually another index is up. They balance each other out. Talk to a financial coach to help you understand the importance of diversification for not only performance, but better peace of mind investing. Owning a bunch of stuff doesn't qualify as diversification