Excellent work understanding asset classes! Now let's learn one of investing's most important rules: diversification.
Remember the phrase "don't put all your eggs in one basket"? That's exactly what diversification means in investing.
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Why do you think putting all eggs in one basket might be risky?
Here's why diversification matters: different investments perform well at different times. When stocks go down, bonds might go up. When U.S. companies struggle, international companies might thrive.
By owning multiple types of investments, you reduce your overall risk.
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Can you recall a time when success in one area offset trouble in another?
Let's see diversification in action. Imagine you put all $10,000 into one tech stock like Tesla. If Tesla drops 50%, you lose $5,000!
But if you split that money across 10 different stocks, and only Tesla drops 50%, you'd lose just $500.
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Which feels safer—one stock or ten?
There are three main ways to diversify your investments: across asset classes, across geography, and across company sizes.
Asset class diversification means owning stocks, bonds, and real estate instead of just stocks.
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From our last lesson, can you name two different asset classes you could own?
Geographic diversification means investing in companies from different countries - not just U.S. companies. Some investors own European stocks, Asian stocks, and emerging market stocks.
This protects you if one country's economy struggles while others prosper.
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Why might owning only U.S. companies be limiting?
