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Most of us desire investments that provide high returns at little risk. Unfortunately, in the real world, risks abound. Decades of study show that diversification is a powerful way to reduce the risk that any one badly performing asset or asset class would ruin your overall return. Diversification, which here means simply a diversity of investments, requires that different assets be correlated with each other only weakly. Thus, even if stock prices crashed, another asset class, such as gold, might soar. Researchers have developed several variations of diversification theory since its inception in 1952.
Afterword
Each of these theories is complex and requires a good deal of study to master. However, the basic message is clear: Diversify your portfolio to reduce risk. Mutual funds and exchange-traded funds offer instant diversification for a particular asset class. A multifund approach can give you diversification across many asset classes.