Different Eggs in Different Baskets
Asset allocation and diversification
In the early 2000s, many people discovered that their mutual funds were not as diversified as they thought. The reason for this was that the underlying stocks or bonds within each fund were practically the same, as in the example of three different colored cans of mixed fruit actually containing the same amount of pears, apples and grapes.
Taking this further, lets look at the old saying don't put all your eggs in one basket. But have you ever heard anyone say that you need to have a variety of different types of eggs within those baskets? That is what diversity WITHIN your different assets groups means. Many members have a 401(k) or something like it and many invest in IRAs. These are excellent places to begin or continue a diversified asset allocation plan.
To keep things relatively simple, lets talk about three different asset groups: Cash Equivalents, Income and Growth. Perhaps the biggest mistake investors make is not having a good foundation of cash in their portfolio. For the sake of the safety and flexibility cash provides, in buying other investments at bargain prices or having immediately accessible funds, it is vital to have a good base of money. Money market accounts, especially those paying higher dividends, are a good place to begin with the Cash asset group. Investors should try to have an Emergency Fund of three to six months of living expenses set aside. But, they should also have a cash component within each of their broader investment accounts, whether a 401(k) or similar, an IRA or a brokerage account.
