In asset allocation, diversification is a hedge against risk. Putting 100% of your money in one stock is extremely risky due to the volatility of an individual stock. A single stock is subject to 5 types of risk: Business Risk (earnings could drop), Financial Risk (the company can’t get funding), Liquidity Risk (you can’t sell it), Exchange Rate Risk (the Yen drops suddenly), and Political Risk (your Italian stock plummets due to an unstable economy). By owning multiple stocks, and asset classes, you reduce the risk without necessarily dropping overall returns. It’s a no-brainer. To learn more about the statistics, I recommend The Intelligent Asset Allocator by William Bernstein.

Wouldn’t it also be wise to diversify your income? First, More >