Diversification means adding a variety of investments. It means not putting all your eggs in one basket. When investing, diversification is very important. When you invest, you are always taking some kind of risk.

When you buy stock in a company, you are taking a chance that the stock price will decrease or increase. You are hoping for it to increase, but it might go down. When you buy a bond, you are taking the chance that the company may or may not pay you back.

At first, risk sounds completely negative, but it is completely necessary to make money investing. The more risk you take, the more money you can make, but the more likely you could lose money. If you don’t diversify, you are increasing your risk of losing money, but you aren’t increasing the amount of money you could make. It’s not the kind of risk you want. The more money you have invested, the worse it will be.

Let’s say you invest $1,000 into stock of one company and they go bankrupt. You’d probably lose a thousand dollars. If you had invested $1,000,000, you’d lose that much more.

It doesn’t matter how much you are investing, you should still diversify. You probably don’t need to diversify as much if you had a much smaller amount invested, but you should diversify the same.

When you diversify, you will need to adjust it depending on who you are and how old you are. When nearing retirement, will should concentrate more of your investments into bonds. This diversification will make sure you don’t lose the money you will need to spend soon.

If you are very young, you should invest most or all of your money in stocks and you can concentrate more in riskier investments. If you are somewhere in the middle, you need to make a nice balance.

If you are unsure how to diversify your money, you can invest in mutual funds. A mutual fund is diversified as is because it includes many investments to begin with. If you want to further diversify, you could choose to invest in a bond mutual fund and a stock mutual fund or in different industry mutual funds.