If the Enron and WorldCom scandals have taught investors anything, it is that betting your future solely on one company’s stock is a huge mistake.
In fact, talk to any financial adviser and the mantra these days is diversify, diversify, diversify. But to average investors, that’s not so simple. What exactly does that mean and how do they go about doing it?
Asset allocation means spreading out your money across different asset classes (such as stocks, bonds and cash) and within each asset class (not buying just one type of stock, bond or mutual fund). The idea is that when one asset class falls, another may rise, which cushions the portfolio.
“At minimum, a moderate investor would probably want to hold five asset classes: large-capitalization stocks, small-capitalization stocks, international stocks, bonds and cash,” said Roger Ibbotson, chairman and founder of the asset allocation firm Ibbotson Associates and finance professor at the Yale School of Management.
But diversification is not always easy or cheap. About 75 percent of mutual funds have minimum investment requirements of $1,000 or more, according to the Investment...
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