How is diversification different from asset allocation?
They are very similar in that they both reduce risk by spreading your investment dollars among different categories. Spreading your money among the different asset classes is a great start, but you need to go another step further. You also need to diversify within each of the asset classes. For example, you wouldn’t want all of your stock investments in the same sector – such as technology or energy. That’s because events in the markets can cause an entire sector to be influenced. If all or most of your money is in that one sector, you’re putting yourself at higher risk than with a portfolio of diversified investments.
