It’s true that buying into a single mutual fund or exchange traded fund (ETF) delivers more effective diversification than you can create on your own. But you can diversify even more by investing in a bunch of funds with different investment objectives (also called an investment portfolio). Here’s why:
Market Forces are Constant
Some investment categories and investment categories will go up and some will go down at any given time.
No One Can Say Which is Which
There is no guarantee that any particular investment or investment category will gain value at any particular time.
Spreading the Risk Makes Sense
Putting some money in many funds decreases your chance of having too many of your investment eggs in the wrong baskets during any given market cycle.
You can create your own investment portfolio by purchasing investments from multiple investment categories. Or, you can have an investment company do it for you by investing in an asset allocation fund or target-date fund. These funds can also serve as a model for those interested in constructing a diversified portfolio themselves.
Spreading your investments across different types of funds can help reduce — though not eliminate — your risk. In the big picture, mixing it up is typically the more prudent way to go.