Why Diversify? The Importance of Diversification!

Diversification by investing your money in different asset classes allows you to benefit from the differences in asset behavior over time - for instance you may park a portion of your money in bonds and a portion in stock, your bond investments will, most of the time move differently than your stock investments.

This allows you to earn a better total return on your money at the end of the day (or more correctly, year or decade) because different asset classes behave differently under different market conditions.

It also allows asset allocation to work its magic, because when you have many different types of assets, you can re-balance periodically so that you sell some of the assets which have done well and buy some of the assets which are depressed.

How:

Asset Class - Stocks, Bonds, Real Estate, CommoditiesInvesting in different asset classes helps to reduce your losses - all asset classes do not move in the same direction at the same time, that is, they are not 'correlated'. Within stocks, you might invest in large caps, mid caps, small caps and so on.

Geographical - Regional, CountryInvesting in different countries is now a reality. There are mutual funds and exchange traded funds which invest in separate regions of the world as well as in single countries.

Can one over do it? Not really, the more fingers you have in different pies the better. Done correctly it can never be bad. Of course, if you have too many investment types than you can manage, it will be to your detriment. Or if the assets you invest in are all correlated, then it means you are not really well invested.