Harvey, the self-proclaimed neighborhood golf pro, lives across the street from you. If Harvey happens to swat his golf ball into your bay window, you’ll have to replace the whole pane. However, if Harvey instead takes aim at your next-door neighbor’s front window, chances are they will only lose 1 of 6 windowpanes. His or her windowpane is not as great an economic loss as yours.
To translate this into investment terms, your neighbor would be better protected against market risk because their money is spread out over 6 different investments. You on the other hand, would suffer a huge loss if all of your money were sunk into just one investment.
- Basic Asset Classes
- What is Asset Allocation?
- What is Asset Rebalancing?